Aldar-Sorouh potential merger offers mixed bag for stakeholders

By Mostafa El-Maghraby, Senior Financial Analyst, Global Investment House

The two companies would form a team to study, in the coming three months, the legal and commercial aspects of a possible merger and provide recommendations to senior management.

Given the current status of both companies and the real estate market of Abu Dhabi, we believe the merger offers a mixed bag for the several involved stakeholders. Details of the proposed deal remain vague at the moment since talks are at a very early stage.

Operationally, the positives materialize for the two companies as they continue to suffer from deteriorating market conditions. The merger in a plain form would increase the combined landbank of the new entity, create significant synergies and eliminate material competition, which should lend some support to the deteriorating margins that both companies are suffering from. On the other hand, the merger would mean more geographic concentration in Abu Dhabi to the new larger entity as well as negligible segmental diversification.

For the government of Abu Dhabi, represented through Mubadala Development Company (49% stake in Aldar) and Abu Dhabi Investment Company (5.6% stake in Aldar and 6.9% stake in Sorouh), creating a new larger entity that is intended to maintain the same strategic plans of the government would be a bang on repetition of the older Aldar model that proved a high degree of inefficiency, from where a private investor stands. Further, the merger would offer the government a larger degree of intervention in controlling property supply in the market.

For equity investors, the merger, in its early rough form, appears to offer a way out from the recent distressed situation and could entail in a large upside potential for shareholders. Aldar is currently trading at a trailing PB multiple of 0.7X while Sorouh is trading at 0.5x. Details remain unclear whether the merger between the two companies would be via a share swap creating a new entity or through blending the assets of one company in the other or any other form.

However, we rule out the possibility of delisting the two companies and/or the new entity as a large stake would remain owned by the public.