Aldar and Sorouh merger a foundation stone for recovery

It's difficult to overestimate the importance of the deal between Aldar Properties and Sorouh Real Estate for the ongoing economic development of the UAE.

The deal - which looks certain to win the required approval from shareholders - could be regarded in years to come as a watershed event that set the seal on recovery in the crucial property sector in Abu Dhabi, and in a wider context rebalanced the Emirates' economic growth model.

The shares of the two companies to be merged moved in opposite directions - Sorouh up, Aldar down - on the day of the announcement, but not too much should be read into that. The dynamics of all-share mergers often produce such peculiarities, reflecting the precise terms of the deal.

Perhaps the most significant reaction to the merger came from Moody's Investors Service, the American ratings agency that has a track record of telling it like it is in the Arabian Gulf, often ruffling corporate and government feathers along the way.

Moody's immediately put Aldar on review for possible upgrade after the merger, signalling to the debt markets that it considered the deal a significant positive development.

The keynote in Moody's announcement was the sentence: "The review would result in an upgrade and the formation of a combined group with conservatively positioned risk profile." That is a ratings-speak seal of approval for the merger and the much less risky financial structure that will emerge.

The ratings agency also noted the "Abu Dhabi Government's willingness to provide systemic support in order to stabilise and consolidate the local real estate market".

That is ratings parlance for the fact that the Abu Dhabi Government has been behind the merger every step of the way, and will continue to support the merged entity, which is viewed as a key instrument of economic and social policy in the emirate.

Other market-watchers also highlighted the extent to which the merger is backed by government approval. Analysts at Arqaam Capital, a Dubai-based investment bank, pointed out that the new entity will manage a land bank of 77 million square metres, valued at Dh4.5 billion (US$1.22bn), and is set to receive a Dh15.2bn cash injection from five government contracts over the next three years.

The Abu Dhabi Government is backing its property "champion" in the clearest possible way: by putting its business through the new company at every opportunity. It also helped sweeten the deal for Sorouh shareholders with the sale of Dh3.2bn of government assets, including lucrative infrastructure projects.

Aldar Sorouh Properties, as the new group will be known, will have a value of about Dh47bn. The Government will own 37 per cent of the enlarged group: enough to ensure control and to demonstrate Abu Dhabi's commitment, but sufficiently low as to encourage a decent market in the new shares, once they get trading.

Synergies and cost savings could give the shares good long-term upside, says Arqaam, especially for current holders of Sorouh stock.

But once the technical mechanics of the merger are out of the way, the real long-term strategic benefits will kick in.

Some critics of UAE economic policy often say that the country needlessly duplicates enterprises, from airlines to ports to stock exchanges. The Aldar- Sorouh merger gives them one fewer stick with which to beat policymakers.

The merged company will play a crucial role in providing affordable residential accommodation in the capital, until now regarded as a problem for its continued expansion.

It will also help redress the balance between Abu Dhabi and Dubai. The latter suffered badly in the property market crash of 2009, which came at exactly the wrong stage of the business cycle. With new properties still coming on-stream at a fast rate, rental yields fell for a couple of years and are just now beginning to strengthen across the board in Dubai.

Even so, Abu Dhabi property is reckoned to be still some way behind the Dubai recovery curve. The creation of a strong, risk-resilient property company in the Aldar-Sorouh merger will hasten that recovery. It looks like a win-win situation for all concerned.