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Middle East: Property merger breathes new life into Abu Dhabi

Aldar, Sorouh agree merger; State to hold 37% of combined entity

Abu Dhabi’s two largest real estate developers, Aldar and Sorouh, agreed terms for a key state-backed merger last month. Progress on the long-anticipated deal is spurring hopes of a rebound in investment in Abu Dhabi, particularly in the property market, where pre-crisis bombast has until now been replaced with a more rational approach.

The companies first confirmed they were in merger talks in March last year. But the question of how to reinvigorate the local property development sector stems from the 2008 and 2009 crash. The crisis led to a sharp slowdown in expectations for Abu Dhabi’s largely state-driven local property market, where optimism has not revived over the past year to the same extent as in Dubai.

"It should provide a fillip for the Abu Dhabi real estate market," says Moustafa Said, senior real estate lawyer at Clyde & Co in the UAE. "Things have been in limbo while the market waited for the deal to go ahead."

Although both companies are still listed on the local exchange, Abu Dhabi’s government had to provide Aldar with up to $10 billion in bailout money in 2010 and 2011. Before the proposed all-share merger with Sorouh, the local state-owned investment firm Mubadala controls 35% of Aldar. A smaller state investment firm, Invest AD, owns 7% in Sorouh.

As part of the merger, the Abu Dhabi government has agreed to pay Sorouh Dh3.2 billion ($871 million) for assets at its Shams Abu Dhabi and The Gate developments. After the merger, the combined entity will remain listed, but the emirate’s government will own 37% of the combined company. Sorouh shareholders will receive 1.288 shares in Aldar for each Sorouh share, giving them 45% of the newly named Aldar Sorouh Properties. The new company will have Dh47.1 billion of assets, a market capitalization of Dh10.9 billion and a land bank of 77 square kilometres. The firms predict they will be able to find synergies of up to Dh110 million a year by 2015.

"Sorouh’s management has a good track record in maintaining a conservatively run balance sheet in a market downturn," says Jan Pawel Hasman, vice-president, equity research, at EFG Hermes. "Aldar’s track record in undertaking large and challenging projects could be useful in generating value from Sorouh’s vast and undeveloped land bank."

Goldman Sachs and National Bank of Abu Dhabi are advising a steering committee overseeing the merger, which includes executives from both developers. The developers’ own advisers are Credit Suisse in the case of Aldar, and Morgan Stanley in the case of Sorouh.

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