News Column

Rise and fall, and rise?

August 1, 2014

From a 59-storey tower in Abu Dhabi, Arabtec's offices look out over the Gulf towards Middle Eastern and Asian nations where the construction firm hopes to expand. It is a symbol of the company's ambitions - and the way in which it has run into hard reality.Arabtec agreed last year to lease the entire tower, which was to serve as a base for it to diversify into the oil, power, infrastructure and real estate sectors, providing capacity for thousands of future employees as well as joint venture partners.

Much of that expansion is now in doubt. After a souring of ties between Arabtec's chief executive and a big state investor led to his sudden resignation and a collapse of the company's shares in June, Arabtec has launched a review of its plans.

Founded in Dubai four decades ago by a Palestinian-born businessman, Arabtec rode the region's oil boom to become one of its biggest construction firms. It helped to build the world's tallest skyscraper, the Burj Khalifa in Dubai.

New horizons began opening in 2012 when Aabar Investments, a unit of the Abu Dhabi government's International Petroleum Investment Co (IPIC), raised its stake in Arabtec - effectively giving the firm the backing of Abu Dhabi's oil wealth.

Aabar strengthened its management influence over Arabtec, a process that culminated in February 2013 with the resignation of founder Riad Kamal as chief executive and his replacement with Hasan Ismaik, a Jordanian businessman who was then just 36 years old.

Ismaik moved to Dubai in 1996 to work as a real estate broker, getting a big break a few years later when he arranged a deal for well-connected Abu Dhabi investors to buy several buildings in Dubai.

He started buying shares in Arabtec and by August 2012, was prominent enough to become a non-executive member of its board, a position, which within a few months led to his becoming chief executive.

Investors saw Aabar's backing of the firm as a ticket to great wealth, driving the share price up more than threefold in the first four months of this year. In February, Aabar asked Arabtec to build 37 new towers in Abu Dhabi and Dubai. The deal was worth $6.1 billion, or three times Arabtec's total revenues in 2013.

In March, Arabtec agreed on an even more spectacular deal, to build one million houses in Egypt in a $40 billion project backed by the Egyptian and UAE governments.

Ismaik pushed plans to diversify the firm, explored acquisition opportunities and publicly discussed the idea of launching a string of initial public offers of shares in Arabtec units across the Middle East. Foreign expansion plans included opening an office in Serbia to target the Balkans.

"That was my vision - to take Arabtec to an international level," Ismaik told Reuters last month.

But for many fund managers, who had seen Arabtec's stock soar far beyond their estimates of fair value as leveraged investors bid it up in response to the bullish predictions, the story was too good to be true - and so it proved.

Arabtec shares began plunging in mid-May as rumours circulated of a dispute between Aabar and Ismaik, raising the spectre of Arabtec losing Aabar's support and being forced to slash its growth plans. Aabar declined to make any comment.

The rumours snowballed in early June when stock exchange data showed Aabar had suddenly cut its stake in Arabtec to 18.94 per cent from 21.57 per cent over several days.

In mid-June, Ismaik publicly denied there was any rift with Aabar, but the writing was on the wall: two days later he resigned, saying he wanted to pursue his own business interests.

From mid-May to their low in early July, Arabtec shares lost an astounding 70 per cent. Adding to investors' jitters was uncertainty about the fate of Ismaik's stake in Arabtec.

In late May, Arabtec said Ismaik had raised his holding to 21.46 per cent from 8.03 per cent; there was no explanation of when, or why this had not been disclosed earlier, since bourse rules require changes in stakes above five per cent to be revealed promptly. In mid-June, when Ismaik quit, bourse data showed his stake had risen further to 28.85 per cent.

He says he initially bought under several names - legal in the UAE - and that bourse data showed his stake jumping when regulators decided to consolidate the stakes under one name.

Reuters then reported in late July that Ismaik had sold about $4 million-worth of shares in the group, cutting his stake slightly from 28.77 to 28.85 per cent.

Both Arabtec and Ismaik say his stint at the company was productive and that his decision to leave was a personal one; Aabar declines to comment. But a number of senior executives linked to Ismaik have left Arabtec since his resignation, company sources say, suggesting Aabar wants a change of management style.

The scars left by the Arabtec saga on both the company and the stock market may heal with time. Arabtec chairman Khadem Abdulla al Qubaisi held a news conference last month to say the firm's construction projects remained on track and Aabar continued to support it.

Aabar may further tighten its control of Arabtec; a board member from IPIC, Mohamed al Fahim, took over as acting chief executive.

But Arabtec looks likely to be a more sober, cautious firm than it was in Ismaik's day. Qubaisi said it was now cutting costs, reviewing excessively high salaries and putting less emphasis on the diversification plans championed by Ismaik.

"We are reviewing a lot of things," Qubaisi said, adding that the company was restructuring itself to focus on its core construction business.

In particular Arabtec may outsource more of its new projects rather than bulking up itself, which could be costly and disruptive. Analysts believe the firm, which earlier this year said its workforce totalled about 63,000, would need to hire thousands more white-collar staff to manage giant deals such as the Egyptian housing construction project.

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Source: Gulf, The (Bahrain)

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