U.A.E. Plans to Merge Aluminum Makers in $15 Billion Venture

Abu Dhabi’s Mubadala Development Co. will buy a stake in state-owned Dubai Aluminium Co. to merge the United Arab Emirates’ two aluminum smelters and create a $15 billion joint venture, a person with knowledge of the plan said.

Mubadala will pay an undisclosed sum, said the person, who asked not to be identified because the plan is confidential. It will team up with state-owned Investment Corp. of Dubai to join Dubai Aluminium with Abu Dhabi-based smelter Emirates Aluminium Co. in an equally owned venture, Mubadala and ICD said.

Aluminum producers worldwide are contending with oversupply that’s squeezing profits, while nations in the Persian Gulf are developing metals to petrochemicals to cut reliance on oil sales and add jobs. Dubai and state-linked companies are preparing to repay about $20 billion in debt in 2014 in what Moody’s Investors Service has called a “pivotal year” for the emirate.

“The No. 1 reason for doing a deal like this has got to be more on the financial side, in that this may help them better raise funds to expand,” Kenneth Hoffman, a senior metals analyst with Bloomberg Industries, said by telephone. “Here you have two very young companies with very low-cost facilities, so this is a venture that’s going to consolidate to expand.”

Emirates Aluminium, or Emal, is currently held between Mubadala and Dubai Aluminium, or Dubal.

Output Growth

The new joint venture, Emirates Global Aluminium, will have an enterprise value of more than $15 billion, Mubadala and ICD said in a statement yesterday. It will be the fifth-largest global aluminum maker once Emal completes an expansion in 2014, they said. Emal is raising annual output to 1.3 million metric tons from 800,000 tons. Dubal produces 1 million tons a year.

“The creation of a new global industrial champion anchored in the U.A.E. is an important step towards realizing our vision for a diversified and sustainable economy,” Mubadala Chief Executive Officer Khaldoon Khalifa Al Mubarak said in the statement. Mubarak, also chairman of Emal, will take the same role at Emirates Global. Dubal CEO Abdulla Kalban will be managing director and CEO of the merged company and Emal CEO Saeed Al Mazrooei will head its U.A.E. operations.

Officials at Dubal couldn’t be reached by telephone at the company’s Dubai offices to comment further on the transaction. The merger is set to be completed next year, the partners said.

Dubai Debt

Dubai pulled itself back from the brink of default in 2009 with the help of $20 billion from Abu Dhabi, the U.A.E. capital and its largest sheikhdom, and the national central bank. The second-largest emirate needed the bailout after state-linked companies that borrowed to help build Dubai into a tourism and commercial hub saw access to funds dry up in the global financial crisis and as property prices plunged.

The International Monetary Fund estimates Dubai accumulated about $113 billion of debt as it grew. The government has $26 billion of principal payments outstanding on bonds, including $17.9 billion maturing next year, data compiled by Bloomberg show. Dubai World is among state-linked companies with impending debt repayments. The company, which holds port operator DP World Ltd., has $4.5 billion in debt due in 2015, Bloomberg data show.

The smelter deal “should help quieten the doomsayers who like to exaggerate the competition between the two emirates,” Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi PJSC, said yesterday. “Not only does this deal benefit the two emirates, but it firmly places the federation on the map as a major player in the aluminium industry.”

Earlier Approach

It’s not the first time Mubadala has sought to acquire a holding in Dubal. Gulf News reported in March 2011 that the investment company had offered to buy a stake. The Dubai smelter was valued at $7 billion at the time, the newspaper said, citing Vice Chairman Ahmad Humaid Al Tayer.

Combining the U.A.E.’s metals producers may help create a company with the scale needed to get better prices when accessing capital or raw materials such as bauxite, according to Bloomberg’s Hoffman and Aleksandar Stojanovski, a Dubai-based analyst at Deutsche Bank AG. Mubadala is seeking bauxite through ventures such as its Guinea Alumina Corp. partnership.

Emal intends to spend about $4.5 billion on the planned capacity expansion. It raised a $3.4 billion loan in April, a banker familiar with the deal said at the time. It may sell a bond this year to fund the work, Mubadala officials have said.

Unprofitable Operations

About 20 percent of the world’s aluminum is produced at a loss, United Co. Rusal, the biggest manufacturer, said last month. Global output has exceeded demand for the past eight years, according to data compiled by Bloomberg. The industry will produce a surplus through 2015, according to Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia.

The metal is the third-worst performer on the UBS Bloomberg CMCI index of commodities in the past five years.

Falling prices contributed to last week’s decision by Moody’s Investors Service to reduce its ratings on Alcoa Inc., the largest U.S. aluminum producer. The long-term rating on $8.6 billion of debt was lowered to Ba1 from Baa3, one level below investment grade.

“There’s a lot of overcapacity in the market, so in the interim it’s a challenge for the companies,” said Stojanovski of Deutsche Bank. “The largest amount of overcapacity is located in China and doesn’t look like it will be closing, so it’s difficult to see prices going anywhere any time soon.”

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