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Dubai property mega-merger starts sector consolidation

 News that publicly listed Emaar Properties has started merger talks with three Dubai Government owned property companies – Dubai Properties, Sama Dubai and Tatweer – is to be welcomed as the beginning of a necessary consolidation of the sector.

The devil will be in the detail, and a four-way merger is bound to be complex. Yet this process is both inevitable and healthy after the collapse of the Dubai property boom last autumn.

Crisis-hit advisers

Emaar will be advised by Royal Bank of Scotland, itself now partly nationalized as a result of the financial crisis, and the Dubai Government companies by Merrill Lynch, now part of Bank of America after a forced banking consolidation.

The main problem in concluding this four-way merger will be agreeing asset valuations. It is one thing to trumpet headline project values, quite another to determine the value of a half-completed project whose cash requirements make it an immediate liability and not an asset at all.

But this is where the common ownership thread is vital, and Emaar is actually 32.5 per cent owned by the Dubai Government as well. The interests of other shareholders also have to be taken into account of course – in the absence of a majority stake – but this is an enormous advantage in driving a complex consolidation to a successful conclusion, creating what will be one of the largest property companies in the world.

Who runs the merged company?

There is also the issue of who controls what after the consolidation and the form of the company. Moreover, for Emaar as the listed entity that means determining the extent of dilution to its existing shareholders or facing the creation of an entirely new listed entity.

But Emaar shareholders are unlikely to assume control of such a huge portfolio of Dubai real estate at no cost to their equity holdings. On the other hand, the potential upside in any recovery will be proportionately greater and the risk-reward ratio could be attractive.

However, foreign observers will welcome the news that Dubai is grasping this thorny problem now and not allowing the situation to fester further. It could also be that consolidation emerges in other sectors of the local economy: there are four Dubai islamic banks for example that might be more profitable if combined into a single regional champion.