The US$1.7 billion (Dh6.24bn) acquisition of Arabtec Holding by Aabar Investments has hit another obstacle as both sides have agreed to extend the deadline to complete due diligence by another month. "The fact that they are extending the due diligence makes me suspect that they are finding there are more impairments to the receivables than what the market originally factored in," said Chet Riley, an analyst at Nomura Securities in Dubai.
Aabar, the Abu Dhabi-owned investment company, said in January that it would buy a stake of 70 per cent in the country's largest construction firm at Dh2.30 per share by using a convertible bond. Analysts said the extension of due diligence may signal that Aabar was waiting to see how Arabtec's business had fared since the deal was announced on January 8. The company's stock price has declined from Dh2.89 on the day of the announcement to Dh2.17 yesterday, meaning Aabar's purchase price of Dh2.30 per share would be at a premium to the market price. Arabtec is set to report its earnings this week, which are expected to provide a more detailed picture of the company's exposure to Dubai's faltering property market.
Once the earnings come out "we will get a much clearer sense of what the provisions actually are", Mr Riley said. Arabtec's fortunes are intimately tied to the Gulf's property sector, which has suffered lately as prices declined and investors retreated in the wake of the global economic uncertainty. Property prices in Dubai are estimated to have fallen by as much as half last year, and by almost that much in Abu Dhabi.
Arabtec said last week it had stopped work on one of the largest housing projects of the Dubai World-owned developer Nakheel because it had not been paid for its services. As a slowdown in Arabtec's business grows more evident, Mr Riley said Aabar could be contemplating reducing the cost of its acquisition, or the "strike price" of the convertible bond. "My view is that as part of the due diligence process, they will lower the strike price further," he said. "Aabar will come back with a revised price. If you're Aabar, why would you buy something at Dh2.30 when it's trading at Dh2.17?"
The deadline for due diligence - a standard process in which a company evaluates the financial health of another firm it is acquiring - had initially been set at the middle of last month, roughly a month after the announcement of the deal. It was then extended to the middle of this month and yesterday Aabar was given an additional month to conduct its review. On Thursday, Riad Kamal, the chief executive of Arabtec, said the deal was progressing.
A deal would still need the backing of 75 per cent of Arabtec's shareholders and approval from government regulators before going through. Shareholders are to vote on it at an extraordinary general meeting following the completion of due diligence. While the deal will give Arabtec much-needed cash to tide it through the economic downturn, analysts have said it would also seriously dilute the value of existing shareholders' stakes. That factor has prompted some scepticism about the deal, and last month Deutsche Bank cut its price target for Arabtec shares to Dh3 from Dh4.50.
The deal has also been plagued from early on by rumours about insider dealing after trading volumes in Arabtec shares spiked in December, a charge that Aabar denied days after the deal's announcement. "I should hope that whatever the board of Arabtec sees as beneficial, that the shareholders will also see as beneficial," said Mr Kamal. The extension of due diligence will allow the deal to move forward on a "clean slate", said Mala Pancholia, an equity research analyst at Al Mal Capital, the investment bank.
"In our view, that's a good way to move forward; it gives Aabar the chance to be able to change aspects of the deal if they want to - meanwhile, Arabtec gets the chance to clean its balance sheet before the deal moves forward." Meanwhile, Mr Kamal said Arabtec has stopped work on one of Nakheel's largest housing projects because it had not been paid by the Dubai World-owned developer. The company had been building Al Furjan, a development that was originally planned to include 4,000 homes, until the beginning of this year. It won the $816 million contract for the first 1,500 homes in June 2008, but completed only 550.
Mr Kamal said no payments had come through from the developer since December's $10bn cash injection from Abu Dhabi. * additional reporting by Angela Giuffrida firstname.lastname@example.org email@example.com