There is a shake-up going on in UAE stock markets, kicked off by the announcement of a merger between the Dubai Financial Market (DFM) and NASDAQ Dubai. For the sake of market transparency and integrity it cannot happen a moment too soon, if the current situation involving Aabar and Arabtec is anything to go by. At least on the regulatory front, the DFM could do with an immediate injection of the rigorous sanctions NASDAQ Dubai has at its disposal. The Aabar-Arabtec affair also further advances the argument that Emirates Securities and Commodities Authority (ESCA), the UAE federal watchdog, should also be in on the merger.
Only an Emirates-wide approach to market supervision and regulation can help prevent a mess such as Arabtec-Aabar happening again. Let's step back a few weeks to understand what has happened with these two important UAE companies. Aabar, which is listed on the Abu Dhabi Securities Exchange, is 71 per cent owned by the International Petroleum Investment Company, a major Abu Dhabi financial flagship. Through Aabar, it has made high-profile foreign investments such as the holdings in Daimler and Virgin Galactic.
Arabtec is one of the construction groups that have built modern Dubai. It played a major part in the transformation of the emirate in the boom years, building across a wide range that included luxury villas, high-rise apartments and airport facilities. Towards the end of last year, as the property downturn took a serious grip on Dubai, it became apparent that Arabtec was going to have to take radical action to help it through the tough times.
While most analysts thought Arabtec was reasonably well capitalised, there were concerns about where future business would come from, and some worries about the strain of meeting trade liabilities. This put pressure on its share price, which, having held up well most of the year, began a sharp downward spiral in the autumn. Dubai World's difficulties in November only served to highlight Arabtec's own problems, leading to a further sharp sell-off. On December 9, its shares dropped to Dh1.73, an 11-month low.
About this time there was the first market buzz that Arabtec could have found a solution to its problems in the shape of a deal with Aabar. It looked a win-win situation. Arabtec could recapitalise itself with Abu Dhabi cash, and gain access to the more resilient construction business in the capital. Aabar would gain the expertise of one of the UAE's foremost contractors at a good price. The share price started to climb back as rumours of a deal circulated. By December 28, they had gained some 57 per cent as news agencies reported market speculation of a link-up with Aabar.
Then something peculiar happened. Arabtec said it was unaware of any reason for the share price rise and added that no talks had taken place with the Dubai company. But the shares kept on rising. They carried on their upward trajectory even when, a few days later, Aabar reiterated that there were no talks. To carry on buying in the face of denials from the two principal parties to the transaction required a lot of bravery on the part of those shrewd punters on the DFM, who were backing with hard cash their judgement that a deal would go ahead.
Shrewd? Well, not as it turned out. When a few days ago Aabar and Arabtec announced that they would, after all, be combining, the shares immediately fell on fears of dilution of existing shareholders by Aabar's 70 per cent stake. But by then anyone who had bought in the period after 9 December already had ample opportunity to get out of the stock with a handsome profit. A couple of days ago, the DFM said it was looking at the Arabtec share price fluctuations as part of a routine review mounted when there had been big movements ahead of an announcement. It does not need too much sophistication to see that something strange has happened.
The right course of action for the DFM, once it has formally analysed the trading patterns, would be to hand over the case to the ESCA, the proper body to determine whether anything improper has taken place. With hindsight, another course of action should have been adopted once the shares began their leap last month. As is common in other stock markets, trading in both companies should have been suspended, and their boards should have issued statements to the effect that they were in talks that could lead to a takeover offer, but may not necessarily do so.
That would have immediately halted any possibility of speculative gain and given both companies time to reach a measured deal. The case of Aabar-Arabtec proves that only a UAE-wide approach to market regulation will do. @Email:fkane@thenational.ae
