Arabtec Shareholders may Gain from Aabar Offer

The report issued on Friday said that a sharp decline in stock price of Dubai-listed Arabtec shows the market is too focused on the acquisition price and dilution. The market “is missing the potential added value that Aabar can offer to compensate for the discount,” analysts Ahmed Badr said.

Abu Dhabi-based investment fund Aabar last week offered to buy a 70 per cent stake in construction giant Arabtec via a mandatory convertible bond for a fixed purchase price of Dh2.3 per share — a 20.4 per cent discount to the closing share price on January 7 of Dh2.89 per share.

The deal, which requires Arabtec to issue new shares and in the process dilute earnings for existing shareholders, was received with a selling-spree at the stock market with Arabtec shares losing over 15 per cent of their value last week.

Aabar and Arabtec have completed legal diligence as per schedule announced last week. However it could take another month to close the Dh6.4 billion deal as an Arabtec EGM is unlikely before early next month where three quarters of shareholders must still approve the sale to Aabar.

Badr agreed that the deal is very dilutive, by about 70 per cent, to earnings per share EPS and the acquisition price is at a 31 per cent discount to his heavily-discounted target price of Dh3.33 per share. But a sensitivity analysis shows that Aabar, majority owned by the Government of Abu Dhabi, can help improve the current backlog estimates by giving Arabtec access to projects in Abu Dhabi, he said, adding the cash injection of Dh6.4 billion will also enhance Arabtec’s balance sheet and boost Arabtec’s ability to bid for 
larger projects.

“Assuming that Arabtec can secure an additional Dh4 billion ($1.1 billion) a year, we estimate this would add Dh0.66 per share, thus resulting in an implied acquisition price of Dh2.96 per share (Dh2.3+Dh 0.66), a 3 per cent premium to market price on January 7.”

Badr said that Arabec’s depressed valuation was always due to balance sheet concerns regarding risk of receivables impairment, which resulted in Arabtec trading at a wide discount of 68 per cent to global peers over the past 12 months. “This will no longer be the case post the deal as the stock would re-rate as a result of the Dh6.4 billion cash injection,” he said.

Badr said that Arabtec can also utilise the cash in international expansion. A strong cash position will help secure funding from banks for large projects across the region, give confidence to acquire other regional contractors to secure a footprint in markets such as Libya, Saudi Arabia and possibly Algeria.

“Although we continue to exclude it from our forecast, but the cash injection implies that Arabtec’s Dh10 billion ($ 2.7 billion) project in Russia may be on track and the company needs to have enough cash to fund construction.”

The project in St. Petersburg, the old imperial capital of Russia and its second biggest city is a 400-metre high twisted glazed spiral flame shape structure, having the shape of a flame that resembles the logo of Gazprom. The project is called Okhta Social and Business Centre. It was previously named as Gazprom City; but in March 2007, the project was renamed after the Okhta River.

“Assuming our analysis is correct; we believe Aabar could add significant value to Arabtec’s shareholders through fundamentally improving the outlook of Arabtec’s backlog and earnings. We believe that if Arabtec’s management can present a strong growth case to shareholders and a clear guidance on the Dubai receivables, shareholders would vote in favour of the deal,” Badr said. — ovais@khaleejtimes.com