Mixed view on winners and losers of Aldar Sorouh merger

Aldar shareholders, being pegged as the winners in a proposed merger with Sorouh, may find the tables are turned on them once a deal is announced, say analysts.

Bank of America Merrill Lynch projects that a combined entity with a market cap of US$2.45 billion (Dh8.9bn) would give a merger ratio of 1.56 times, or one Aldar share for every 1.56 Sorouh shares.

Aldar and Sorouh have yet to announce the actual merger ratio. But if the US bank’s prediction is correct, Aldar’s stock is the more valuable of the two companies.

Its shareholders would get one share in the merged entity for each  one they hold, whereas Sorouh shareholders would get only one new share for every 1.56.

However, analysts have viewed the bank’s assessment with caution. Mohammed Al Yasin, an independent analyst, said on book value – the net asset value of a company – Sorouh was the better bet.

“Sorouh should be a higher price than Aldar in my mind.

“In terms of assets the two companies are about the same, but Sorouh’s book value is 2 compared to Aldar’s 1.75. Also Aldar’s liabilities are about three times that of Sorouh,” he said.

Shares in both have been trading at parity or very near parity since two weeks before the merger was announced. The lockstep in prices of the two firms implies investors believe a merger will happen on a 1 to 1 basis, where investors swap their Sorouh and Aldar for the same number of shares in the new company.

Mr Yasin said the parity partly represented investors hedging their bets until details of the merger were made public. “People are unsure what any merger valuations will be so they are buying both, which is keeping the share price the same.”

Under Bank of America’s valuation, Aldar and Sorouh’s shares should have been trading at Dh1.99 and Dh1.28 respectively after the merger announcement on March 11. However, both stocks closed at Dh1.34 the following day.

Today both companies’ shares are still trading away from the bank’s valuation – with Aldar at Dh1.32, and Sorouh at Dh1.28. But if the bank’s figure is correct, the current closeness of the share prices offers a buying opportunity.

Shares in Aldar and Sorouh both closed at identical prices on three consecutive days before they announced they were weighing up a merger.

Prior to this, Aldar had been trading at a premium of 10 per cent to its smaller rival Sorouh.

Shares in both companies closed down yesterday. Sorouh fell 6.47 per cent to Dh1.30; Aldar dropped 5 per cent to Dh1.33.

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