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First with Financial Comment from Arabia

Why does Abu Dhabi want to invest 1.7bn in Arabtec?

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Aabar Investments, which is 71 per cent owned by the UAE federal government, is offering $1.7 billion to acquire a 70 per cent stake in the UAE construction giant Arabtec through a convertible bond.

At first sight this appears an odd time to invest in a construction company. The share price might be well down on the boom years of the UAE but then so is the construction market. Most contractors in the UAE have a chain of unpaid invoices as long as your arm, and some look is peril of going under if the banks pull in their credit lines.

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Arabtec has always been a bit different. Its management is widely respected as the most astute in the local market and one that delivers a quality product on time and to budget. But it would hardly be reasonable to suppose that the biggest firm in the Dubai market has been entirely immune from the worst property crash in the world in 2009.

Chairman Riyad Kamal told Gulf News the deal ‘will strengthen Arabtec in more than one way because there will be an injection of $1.7 billion through the increase in capital… It will give potential for investment in acquisition or participation in the equities of future projects, and in opening the potential for further projects in Abu Dhabi.’

He saw this as a ‘win-win transaction for both companies and a marriage like this is something that should be encouraged and welcomed by investors in both companies and by the market in general’.

The ‘market in general’ might disagree. Rival contractors will now face a well-capitalized Arabtec with an almost bottomless pocket. But it is true that a market in which the strongest survive is following the brutal discipline of capitalism and wealth creation.

Abu Dhabi contracts

Having a national champion in the sector, rather than a company with a possible cash-flow problem, is clearly also valuable for the expansion of Abu Dhabi, and its ambitious construction program is still very much intact despite the global recession.

Arabtec has also been very successful in overseas expansion and a capital injection should accelerate this process. It now needs a 75 per cent majority of Arabtec shareholders to agree this deal, which does dilute their ownership, but they would be foolish to turn it down.

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Written by Peter Cooper

January 10, 2010 at 10:18 am

One Response

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  1. I must admit this is very funny. Usually when companies buy out other companies or invest in them their stocks usually skyrocket or climb for the very least and in this case the stock prices being diluted lol..

    http://www.bloomberg.com/apps/news?pid=20601087&sid=atCUR4c1FpXU&pos=4

    Andy

    January 10, 2010 at 4:49 pm


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