After Abu Dhabi property merger, more streamlining seen
* One of region's biggest mergers of listed companies
* Abu Dhabi cracking the whip with state-linked firms
* New firm will still face high-end oversupply
* Lack of clarity on management, business model
* But merger could benefit stock as well as property market
DUBAI, Jan 30 (Reuters) - The state-backed union of Abu Dhabi's two biggest property developers is likely just the first step in a wider consolidation that will see projects and state entities merged in a bid to stabilise the real estate market.
After nearly a year of talks between some of the emirate's top business moguls and government officials, Aldar Properties and Sorouh Real Estate agreed last week on a merger which will create a company with $13 billion in assets.
It is one of the biggest-ever mergers of listed companies in the Middle East, a region where the fierce independence of company boards, and their ties to governments and powerful business families, have tended to discourage large acquisitions.
Aldar, nearly 50-percent owned by the Abu Dhabi government via channels including the emirate's sovereign wealth fund, built the Yas Marina Formula One circuit in Abu Dhabi.
Sorouh is smaller and has less government ownership, but members of Abu Dhabi's ruling family own significant stakes in the firm through investment companies.
The two firms struggled with the bursting of a bubble in Abu Dhabi's property market and Aldar had received some $10 billion in state aid over the past two years.
Although negotiating the merger was difficult, the government's economic imperatives ultimately won out. Abu Dhabi, despite enjoying hefty oil revenues, is cracking the whip with state-linked firms, demanding that they curb their debt, become more accountable and deliver stronger performance.
"The government took this bold step to consolidate supply" of new real estate projects, said David Dudley, head of the Abu Dhabi office for consultancy Jones Lang LaSalle, one of the advisors on the merger.
"There may not be more mergers of companies, but we will see consolidation of government entities and also projects," he said. A range of state agencies and other state-linked bodies moved into property development in the past five to seven years.
"Government entities that own land, but (for whom) developing properties is not their core business, will now not be supported by the financing system."
SHIFT IN FOCUS
The success of the new company, Aldar Sorouh Properties, will hinge partly on whether it can ride out an excess supply of high-end property developments.
Property prices in Abu Dhabi have tumbled about 50 percent since the global financial crisis hit a few years ago, analysts estimate. In a January report, Jones Lang LaSalle estimated Abu Dhabi was 18 to 24 months behind Dubai in the property cycle, so that its market was not expected to turn up in 2013.
"There is a mismatch between the underlying demand and what has been delivered," said Loic Pelichet, assistant vice president at NBK Capital.
"The merger still does not solve the immediate issues facing the property market, mainly over-supply at the high end. It may stabilise things, and will eventually be positive, but only in the longer term."
Eventually, analysts said, the new company will need to stop relying so heavily on government spending - primarily housing projects for United Arab Emirates citizens - and instead emulate profitable developers such as Emaar Properties.
Dubai-based Emaar, builder of the world's tallest tower, is heavily involved in mid-range as well as high-end residential projects and responded to Dubai's slump by developing successful retail and hotel industry projects.
Shareholders are expected to approve the share swap in votes on Feb. 21, with the merger to be completed by June 30. But agreement between the companies' boards was only reached after the government said it would pay Sorouh 3.2 billion dirhams ($870 million) for infrastructure and residential assets.
"Our cash position has been fine for some time," Sorouh's Chief Financial Officer Richard Amos told Reuters on Monday, adding that discussions with the government on being paid for the infrastructure had been accelerated by the merger talks.
Some institutional investors are not fully convinced that the new firm will prosper. The full management team has not yet been revealed - Aldar Sorouh Properties has named only the incoming chairman, who is Sorouh's current managing director - while some investors want to know more about its business model.
"They should have announced a chief executive, a financial officer and an operating officer by now. Writing terms on paper is not as complicated as execution," said a UAE-based banker, declining to be named because of the sensitivity of his remarks.
But the creation of a financially healthy company that is better able to time its projects in response to market conditions may benefit not only the real estate sector but also the stock market.
It "will attract new institutional money, given its solid backing by the government, the weight it has on the market and the solid pipeline of projects in Abu Dhabi, given the government's plans of expenditure in the coming three to five years," said Mohammed Ali Yasin, managing director at NBAD Securities.
Incoming chairman Abubaker Seddiq al-Khouri said last week that the new company would need no further assistance from the government, adding that projected cash flows of 15 billion dirhams from government contracts would be used to reduce a debt of 13.4 billion dirhams in the coming three years.
"It's a smart move from Abu Dhabi. In this part of the world, many companies need to die but they refuse," said a Dubai-based banker. Now, "one company dies and a bigger one survives."