* Smaller Sorouh to be delisted upon merger completion
* Sorouh investors to get 1.288 Aldar share for each Sorouh
* Abu Dhabi govt, related entities to own 37 pct of new firm
* Merger subject to 75 pct shareholder approval (Adds details from conference call)
By Stanley Carvalho and Dinesh Nair
ABU DHABI, Jan 21 Abu Dhabi's two biggest property firms have agreed a state-backed, all-share merger to create a business with $13 billion of assets which the government hopes can stabilise a market hit by oversupply and falling prices.
The tie-up between Aldar Properties, which has been bailed out by the Abu Dhabi government over the past two years with around $10 billion in funding, and Sorouh Real Estate creates the second-largest listed property firm in the United Arab Emirates and one of the biggest in the Middle East.
The deal, announced on Monday, comes as Abu Dhabi's property market struggles with a huge supply of high-end homes that entered the market last year and as the emirate conducts a review of its state-owned entities. The government owns nearly 50 percent of Aldar through state-linked businesses.
Property prices in Abu Dhabi have tumbled about 50 percent since the global financial crisis hit a few years ago, analysts estimate. Combining Aldar and Sorouh, the No. 1 and 2 developers respectively and which rely heavily on government contracts, will ensure better coordination of new property developments.
It will also generate cost savings, the two firms said.
"It is very important for the combined entity to be aligned with the overall strategy of Abu Dhabi," Abubaker Seddiq al-Khouri, Sorouh's managing director and proposed chairman of the new business, said on a conference call. "We will be building a company that helps in the overall development of real estate in the emirate but also doing that in a cost efficient way."
Keen to avoid a property collapse like in Dubai which triggered that emirate's debt crisis in 2008, Abu Dhabi began pressing its public sector employees who live outside the emirate to relocate within its borders. It also delayed some ambitious public property projects.
With the support of the government, management of Aldar and Sorouh had held talks for nearly a year on asset valuations, financial terms and the new management structure.
Aldar, which built Abu Dhabi's Yas Marina Formula One motor racing circuit, has relied heavily on the government in recent years for funding. Abu Dhabi has spent more than $10 billion on the company, equivalent to the amount it deployed to rescue Dubai from a near bond default in 2009.
The new entity will need no further assistance from the government, al-Khouri said, adding projected cash flows of 15 billion dirhams ($4.1 billion) from government contracts will be used to cut down on 13.4 billion dirhams debt of the combined entity in the coming three years.
"The focus of the new firm will be on deleveraging," al-Khouri said on the call.
As part of the transaction, Sorouh shareholders will get 1.288 Aldar shares for every share they own. Sorouh will be dissolved and delisted once the merger, which is subject to shareholder approval, is completed.
Sorouh shareholders will get a premium of 16.9 percent, al-Khouri said, without providing details on the basis of calculation. Both the shares closed at 1.63 dirhams on Thursday. On that basis, the premium is 15.8 percent.
The Abu Dhabi government will own a 37-percent stake in the new firm and will also pay Sorouh 3.2 billion dirhams in exchange for some infrastructure assets and units in its The Gate development.
Sorouh shares were up 3.7 percent in Abu Dhabi after the announcement, off earlier gains of 14.7 percent. Shares in Aldar fell 9.2 percent. Shares in Aldar and Sorouh have more than doubled in the last year in anticipation of the merger.
"A lot of investors would like to see Sorouh management stay in place - which might drive the share price going forward," said Amer Khan, fund manager at Shuaa Asset Management. "The government backing and ownership makes the merged entity an even more attractive play for long-term real estate.
"What matters now is the management structure, the synergies and the balance sheet. There's a difference between government support and executing well on a profitability plan, and that remains to be seen."
The new firm, to be named Aldar Sorouh Properties, will be 57 percent-owned by Aldar shareholders and 43-percent held by Sorouh stakeholders with management coming from both firms.
The merger will provide up to 110 million dirhams ($30 million) in annual cost savings while the companies expect one-off integration costs of about 60 million dirhams.
"There will be some staff reductions as part of the cost synergies but we have not determined that for now," al-Khouri said, adding the new firm will have 6 billion dirhams in cash.
He expects the deal to be completed in three months, with shareholders set to vote "in a few weeks".
Goldman Sachs and National Bank of Abu Dhabi were advisors to a joint steering committee overseeing the proposed tie-up. Credit Suisse advised Aldar while Morgan Stanley worked with Sorouh.
($1 = 3.6730 UAE dirhams) (Additional reporting by Nadia Saleem; Writing by Amran Abocar; Editing by Mark Potter)