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Dubai’s Arabtec Weighs Merger With Saudi, Kuwait Contractors

Arabtec Holding Co. (ARTC), the United Arab Emirates’ largest construction company, is considering a merger with the biggest contractors in Saudi Arabia and Kuwait, according to Chief Executive Officer Hasan Abdullah Ismaik.

“We are now mulling mergers with the two biggest construction companies in the Gulf, one is in Saudi and one is in Kuwait,” Ismaik said in an interview with CNBC Arabia without naming the other companies. “The benefits will be felt by the shareholders and the market.”

Arabtec, which helped build the world’s tallest tower in Dubai, in February replaced its management after Abu Dhabi state-controlled Aabar Investments PJSC raised its stake and exerted more influence on the company’s board. The Dubai-based builder raised 2.4 billion dirhams ($653 million) in a rights offer in July and said it will use the funds to bolster its oil and gas installation and affordable housing businesses.

Arabtec is in talks to merge with Kuwait’s Combined Group Contracting Co. and Saudi Arabia’s Saudi Oger Ltd., controlled by the family of the former Lebanese Prime Minister Rafiq Al-Hariri, Kuwait’s Al Qabas newspaper said today, citing people it didn’t identify. Arabtec declined to confirm or deny the report. Saudi Oger also didn’t respond to calls, while no one at Combined Group was able to comment.

Mixed Results

A combination with those companies may produce mixed results for Arabtec, Loic Pelichet, an analyst at NBK Capital wrote in a note to clients today.

It would boost the company’s access to Saudi Arabia’s booming market and Kuwait, where the government may be set to raise development spending, he wrote. On the other hand, such a move “would fly in the face of the strategy the company has proclaimed since its takeover by Aabar, namely to push for aggressive expansion into oil and gas engineering,” Pelichet said.

Neither Combined Group nor Saudi Oger are involved in that industry, so a merger would either represent a strategic U-turn or Arabtec would pursue both the merger and the energy exploration expansion “in which case the execution risk would rise significantly.” Pelichet recommends investors sell Arabtec shares.

A merger with the two companies would be very complicated, said Taher Safieddine, an analyst at Shuaa Capital PSC. (SHUAA) Closely held Saudi Oger a has backlog of more than 40 billion riyals ($10.7 billion) and is the second-largest contractor in the kingdom, he said. Combined Group is publicly traded with market value of 131.8 million dinars ($464 million), comparable to Arabtec, he said.

Oil Sense

“It would make more sense to expand capabilities in oil and gas, infrastructure and power,” Safieddine said. “In that case, buying the stakes they don’t already own in Target Engineering and EFECO shows better alignment with their strategy.”

Arabtec owns 60 percent of Target Engineering, which specializes in oil and gas, and 55 percent of EFECO which focuses on mechanical, electrical and plumbing, he said.

The contractor, which is building a branch of the Louvre museum in Abu Dhabi, will bid for the construction of the Guggenheim and Zayed museums in the United Arab Emirates capital after Tourism Development & Investment Co. invited bids, the company said today. Arabtec is evaluating more than 100 billion dirhams worth of projects mostly in civil engineering, infrastructure and oil & gas, Ismaik told CNBC Arabia.

Samsung Venture

The construction company’s joint venture with Samsung Engineering Co. will probably have initial capital of $100 million to $300 million, the CEO told CNBC. Arabtec announced the venture in April to further its expansion in the oil and gas industry.

Arabtec in 2009 started a subsidiary in Saudi Arabia with Saudi Bin Laden Group and Prime International Group Services Ltd. The company is also working with Combined Group in Kuwait on two contracts, Pelichet wrote.

Arabtec shares closed at their highest in 15 months, rising 3.9 percent to 2.65 dirhams. Combined Group was unchanged at 1,240 fils in Kuwait trading.

To contact the reporter on this story: Zainab Fattah in Dubai on zfattah@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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