ABU DHABI Abu Dhabi's two biggest property firms, Aldar Properties and Sorouh Real Estate, have agreed on a state-backed, all-share merger that would create a firm with $15 billion in assets and could help to stabilize the emirate's struggling real estate sector.
The tie-up between Aldar ALDR.AD, which has been bailed out by the Abu Dhabi government over the past two years, and Sorouh SOR.AD creates the second largest listed property firm in the United Arab Emirates.
Sorouh shareholders would receive 1.288 Aldar shares for every share in Sorouh, which will be delisted once the merger, which is subject to shareholder approval, is completed, the companies said on Monday.
Sorouh shares jumped 8 percent on the Abu Dhabi exchange after the announcement, while Aldar dipped 1.8 percent.
"The proposed merger will create a stronger and more diversified company to take advantage of future opportunities in Abu Dhabi and other regional markets in the coming years," the companies' statement said.
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, Sorouh said.
Sorouh also said the Abu Dhabi government would pay it 3.2 billion dirhams in exchange for some infrastructure assets and units in the company's The Gate development.
With the support of Abu Dhabi, which owns a major stake in Aldar, managements of the two companies 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 bond default in 2009.
Goldman Sachs (GS.N) and National Bank of Abu Dhabi NBAD.AD are advisors to the steering committee overseeing the proposed tie-up. Credit Suisse CSGN.VX advised Aldar while Morgan Stanley (MS.N) worked with Sorouh.
The merger between the two firms comes as Abu Dhabi's property market continues to struggle with a huge supply of high-end homes that entered the market last year.
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."
Abubaker Seddiq Al Khouri, Sorouh's managing director, is proposed to be chairman of the merged company.
(Reporting by Dinesh Nair, Nadia Saleem and Stanley Carvalho; Writing by Amran Abocar; Editing by Andrew Torchia)