Dubai property developer Emaar tumbles on merger announcement

News of the creation of the world's largest developer hit the company's stock hard, shedding 10% during the day.

The market gave its verdict yesterday on the proposed merger of Emaar, Dubai Properties, Sama Dubai and Tatweer. Emaar's shares fell 10 per cent, the maximum allowed by the bourse.
Mohammed Alabbar, the chairman of Emaar, said in a statement to the Dubai Financial Market that the move would lead to the creation of "the largest property developer in the world". The merger process is scheduled to be finalised by October. "Based on preliminary review, Dubai Properties, Sama and Tatweer have a robust and strategic asset base [attractive land bank], which will contribute positively to the consolidation," Mr Alabbar said. The proposed entity would have combined assets worth Dh194 billion (US$52.85bn) and total debt obligations of Dh13.4bn, he said.
But the market remained sceptical. "Investors are worried a merger may mean a long share halt, as is the case with Amlak and Tamweel," Mohammed Dwaikat, a broker at Al Fajer Securities in Abu Dhabi, told Bloomberg. "There is also concern about a possible dilution of the shares."
Amlak Finance and Tamweel, the country's largest home lenders, have not traded since November, pending a planned merger.
With Dubai's property market yet to level out and demand for property still low, the merger would pose a risk to earnings, analysts said. All four companies have been badly hit by the downturn and have a number of "off balance sheet" commitments to contend with, such as paying their contractors and other suppliers, and the fees that come with project cancellations. Emaar alone owes its suppliers about Dh8.4bn, according to figures from Al Mal Capital, the investment bank.
Saud Masud, a property analyst at the Swiss investment bank UBS, said that while the merger was good for the long term, the new entity faced a big challenge in the short to medium term. "The risk of earnings dilution is relatively high as the Dubai property market exposure becomes more prominent," Mr Masud said. "The liabilities will likely build up as we progress through this down cycle, with the reasonable chance of asset values being written down, especially as a large portion of acquired assets is land bank. With asset write-downs comes further hits to earnings. This would be in addition to any potential dilution from equity issuances to finance cash flow needs, such as debt or working capital."
Mr Masud said the key would be how management dealt with a deteriorating balance sheet, and how they fixed it for the longer term. "It adds pressure on management to execute operationally and financially on a large scale in light of deteriorating fundamentals," he said. "I still think the deal is much needed for the long-term stability of the market, but near term to medium term it limits potential for earnings upside."
Another question will be how the joint venture deals with Sama Dubai and Tatweer, which are so far regarded as unprofitable.
In November, Sama Dubai said it was reviewing its eight projects, worth a total of about Dh202bn. At least two have since been put on hold: one in Bahrain and one in Saudi Arabia. Progress on The Lagoons, an artificial island development on Dubai Creek, has also been hampered.
Tatweer is the developer behind Dubailand, an entertainment-based property development where many projects have been put on hold.
"As far as we can tell they are not cash generative businesses yet, and will likely remain this way for a few years," said Mr Masud. "There's going to be some significant portfolio rationalisation, otherwise these entities may likely end up insolvent. In order to prevent this you consolidate."
Dubai Properties has about Dh348bn worth of projects, including the sprawling Business Bay and the completed Jumeirah Beach Residence.
Mr Alabbar rejected the view that the partnership would dilute value to Emaar's shareholders. He said in a statement that it would bring value and strengthen financial capability, enabling the combined entity to pursue local and international plans while diversifying the project portfolio.
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