The Arabtec saga: how we got here, and who paid the price

Arabtec, under the leadership of a 38-year-old chief executive from Jordan named Hasan Ismaik, had big plans. His abrupt departure on June 18 put a big question mark over all of them.

Khadem Al Qubaisi, the chairman of Arabtec Holding, right, with board member Mohamed Al Fahim during the press conference yesterday. Ravindranath K / The National
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It was a month that every stockbroker would like to forget. As screens turned red and losses mounted, some investors were left wiped out.

One company was the trigger for the sell-off in Dubai.

Arabtec, under the leadership of a 38-year-old chief executive from Jordan named Hasan Ismaik, had big plans. His abrupt departure on June 18 put a big question mark over all of them.

Yesterday, Arabtec had the opportunity to answer some of the questions. Khadem Al Qubaisi, the chairman of the accident-prone company, faced UAE and international media at the Abu Dhabi headquarters of International Petroleum Investment Company, the government-owned group that has a big say in Arabtec affairs via its control of Aabar.

Mr Al Qubaisi answered questions for nearly an hour, but notably denied that Arabtec’s woes had been the cause of the fall in UAE stock markets over the past month. He mentioned fundamentals, the political situation in the Middle East, and investor sentiment, but Arabtec was not to blame. “I disagree with you that Arabtec was behind this crash,” he told one journalist.

Maybe he is right, and other factors were also at play in the past month’s mayhem on UAE markets, and especially the Dubai Financial Market. But that is small consolation for the investors, big and small, who have seen the value of their shareholdings plummet.

“I can safely say that 95 per cent of my customers that bought into Arabtec lost money. No one came out with a profit. I had clients that were crying. Can you imagine? They were crying,” said Khaldoun Jaradat, the head of Brokerage House Securities in Abu Dhabi.

Shares of Arabtec have lost 65 per cent of their value in less than two months — from a peak close of Dh7.40 on May 14 to yesterday's close of Dh3.31 — amid uncertainty over the company's strategy, hundreds of layoffs, and the future of announced projects after the resignation of Mr Ismaik.

For some, Mr Al Qubaisi’s performance comes as too little, too late.

“Nobody is happy. I believe the shares should have been suspended two weeks ago,” said Fathi Ben Grira, the chief executive at Mena Corp, an Abu Dhabi-based investment company.

At the majlis of a prominent Emirati family earlier this week, which Mr Ben Grira attended, businessmen asked why the regulator had not enforced company disclosure rules.

The Securities and Commodities Authority did not return calls. But in a statement released yesterday the regulator said it had followed the Arabtec situation "with keen interest" and had taken all steps to ensure market safety. But it did not recommend trading Arabtec shares should be suspended while it scrutinised what had gone wrong.

That was the first formal word from the SCA since the crisis broke. The first signs of trouble emerged in the markets when rumours spread that Arabtec’s major shareholder, Aabar Investments, had reduced its stake in the company (this would later be confirmed, with the stake having fallen from 21 per cent to just under 19 per cent).

At the same time, Mr Ismaik had apparently been building his stake in the company — from 8 per cent all the way up to 28.8 per cent. His stake-building was described as a vote of confidence that would reduce volatility in Arabtec’s share price.

Yesterday, Mr Qubaisi said that Mr Ismaik’s stake had actually been at 28 per cent for some time, but held in different companies not directly controlled by him. The SCA had advised that all shares related to Mr Ismaik should be consolidated, Mr Al Qubaisi explained. That did not help dispel the confusion.

The bottom fell out for Arabtec on June 8, a Sunday, as the rumours about Aabar’s diminished stake circulated. Arabtec stock, which had traded in a jagged pattern in the prior weeks, fell 6.6 per cent that day.

On the Monday, it lost another 9.6 per cent; and then another 9.9 per cent on Tuesday, and 7.7 per cent on Wednesday.

On Thursday it rebounded 11.1 per cent as the company said it had no intention to delist, but the sum effect was that for the week, the share price had gone from Dh6 a share to Dh5 a share.

The next week it would fall below Dh4 a share, and the week after that below Dh3.

The timing of the Arabtec spectacle could not have been worse. At the start of June, the UAE had joined the MSCI Emerging Markets Index — after a long struggle to meet the standards of corporate governance demanded by the index compilers.

“Unfortunately the way the regulator dealt with the Arabtec saga has been a disappointment,” said Rami Sidani, who oversees the $343 million Schroders International Selection Fund from Dubai.

“The lack of transparency from the main shareholder, Mr Ismaik, and the increase in his stake from 8 per cent to 28 per cent recently without getting any disclosure from the market is unacceptable by all means in any reputable market,” Mr Sidani said. “Communication with the market has been weak and reflects a lack of corporate governance.”

The Arabtec debacle was watched from afar by fund managers from New York to Shanghai, tracking billions of dollars in emerging market funds.

The entire Dubai market came to be viewed through the prism of a single publicly traded construction company.

“Dubai in particular and the UAE in general have come a long way and the market regulator and decision makers have worked really hard to satisfy complicated requests to achieve the MSCI upgrade,” Mr Sidani said.

“Situations like that put further pressure on the regulator to step up and raise the bar. Today we are part of a widely used global index and accordingly we are under scrutiny from global investors and we are on the investment map globally.”

While the company remained silent, wild speculation moved the market — led by the rumour that the company would be taken private in a move that would mirror what happened to its shareholder Aabar, which was delisted four years ago.

“International investors had fears that it would delist because of the Aabar precedent,” Mr Ben Grira said.

In response, Mr Al Qubaisi said no delisting was planned for the contracting firm.

Back in 2010, the delisting of Aabar Investments provoked similar turmoil in the equity markets because of the limited disclosures that accompanied the move.

The elevation of the country from frontier to emerging market status was supposed to have drawn a line under past corporate governance transgressions and usher a new era of transparency.

Yet even before this latest crisis at the company, Arabtec’s disclosure report card was hardly glowing.

In 2011, Mr Ismaik’s predecessor, Riad Kamal, was banned from trading for six months as the regulator flagged three sales that pointed to violations of rules on insider trading.

Mr Kamal sold shares in Arabtec on three occasions in May 2009 ahead of announcements by the company that it had won contracts, according to a letter sent to him by the SCA and seen by The National.

In 2012, Aabar gradually boosted its stake in the builder in increments of under 5 percentage points across various units, which became a total holding of more than 20 per cent.

That triggered questions of whether it was a hostile takeover.

Five years ago, when it was less ambitious and more predictable, Arabtec’s shares traded in the range of Dh1.25 apiece.

Fast forward a half-decade, and Arabtec stock under the new leadership of Mr Ismaik was trading at Dh8.

But that was not enough.

He said Dh14 was a price that reflected the stock’s fair value, and subsequently upped that estimate to Dh20 — in breach of market regulations that stipulate that company officers should not speculate about the share price of their companies.

Major announcements of projects in Egypt and elsewhere made headlines as did Mr Ismaik’s pledge to turn the company into a top 10 global contractor.

Investors loved it and traders piled in. But the party was to end as quickly as it had begun.

Back at Brokerage House Securities, Mr Jaradat recounts the experience of one client who invested his life savings of Dh300,000 into the market when Arabtec was leading its bull run.

At one point he was Dh100,000 up. Today he is Dh400,000 down.

“There are others who have had to sell their wives’ gold and jewellery,” added Mr Jaradat.

If there is a lesson here, it is that markets need transparency — and when they don’t, it is the small investor who pays.

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