Monday, July 12, 2010
Aabar gets a take-under. Shareholders get under-taker.
Aabar which earlier in the year had attempted to execute a take-under of Arabtec the Dubai based construction firm at a discount to the prevailing price has done itself one better, it is taking itself private 1.45 AED per share. That’s down about 15% from the pre-delisting announcement and about 25% below the high for the past year. Those guys over at Aabar are some smart folks. Not only do they get to take their company private so there won’t be any more of these pesky disclosures as to what the investment arm of IPIC is doing but the valuation they are granting themselves is also 50% of book value. Nice trade.
Most of what I have read in the press makes no sense. There was something about how the shareholders though they might get taken out at the conversion price implied by the bonds that were issued in May. There is NO reason to think that, the conversion price in a mandatory convert is not designed to give a valuation but to imply upside. There has been some talk of ESCA demanding an independent valuation. That would shock me because clearly the IPIC guys have more power than the ESCA guys and whoever was hired to do the “independent valuation” would have a lot to gain from future business from IPIC and little to gain from the gratitude of the minority shareholders.
So what do the minority shareholders have to say about this? We’ll never know. Aabar asked ESCA to allow it to delay the meeting to discuss the delisting to August 8th, from July 27th. ESCA granted the request the same day. Given that the offer expires on August 1st the offer will have ended by the time the meeting is held. Well done Aabar, no need to discuss the merits of the offer at the meeting because anyone who takes it will of course no longer be a shareholder and therefore won’t be there. Aabar may well be addressing an empty room, quiet (rightly) as a tomb. Aabar has once again made an “O plato, o plomo” (lead or silver) offer, this time to its’ own shareholders.
The easy journalistic tack to take with this, and the one which is my natural inclination as a lazy amateur journalist, is to affect righteous indignation at the treatment of the Aabar shareholders. After all they thought they were investing alongside Abu Dhabi, the most prestigious of the Emirates, in an SWF type vehicle and instead they get a take it or leave it offer for 50% of book at multi-year lows. It doesn’t seem fair.
Well, in economic terms it’s not fair but markets have no obligation to properly value things. They do have an obligation to obey their own laws and investors have an obligation to know those laws. In the Emirates of all places investors have no excuses to not know this because the entire body of relevant law is 24 pages long. Don’t take my word for it, read them yourself. They’re sections 2/r and 3/r on the ESCA website. If you throw in another set of rules regarding arbitration which may come into play you still come up with a body of legislation shorter than the Aabar annual report. As a person who reads US financial legislation as kind of a hobby the ESCA Rules are refreshingly brief.
While the Aabar self take-under may be unfair it is not unlawful. This is not because it complies with the law, but because there is no law. If you look though the laws you’ll find nothing on the possibility of either a takeover or a de-listing, nothing about the protection of minority rights in a tender offer nor in the event of delisting. Aabar probably feels, rightly it would seem, that the fact that the shareholders are getting anything is a bit of largesse. If the shareholders are unhappy about it they can ask ESCA for arbitration but given what you can infer from the speed with which ESCA has granted the Aabar request to postpone the meeting it would seem that they will take a narrow view of shareholder rights.
So what happens next in Abu Dhabi after what would seem to be a fait accompli is actually quite interesting. What happens now will set precedent for the UAE and also for the other GCC states which have similarly thin securities laws. Most important is that this says about the plight of foreign portfolio investors in the region who will be, by definition and by law, always be minority shareholders in the region. The best outcome would be for ESCA to demand some kind of consent from at least a majority of the affected shareholders but that also seems unlikely given that the tender expires before the shareholder meeting and ESCA explicitly authorized that change. Still, the laws are yet unwritten and the precedent as yet unset. It’s too late to save the Aabar shareholders but what ESCA decides will have a big impact on how willing future investors are to put their money into the GCC.
While this is not a great episode for the Abu Dhabi capital markets it does put the DIFC under an even darker cloud. While what is happening to the Aabar shareholders is not great, it’s at least because there were no laws to protect them, which they should have known. The DIFC was created in response to the weak legal and regulatory environments in the rest of the GCC. The DIFC actually has superior laws and protections for shareholders and so shareholders should expect some protection and yet it is the site of the most egregious shareholder theft yet to occur in the Emirates. The DIFC may have better laws but lacks is leadership with the courage to enforce those laws.