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(A reference to Drake & Scull was added to paragraph 3. An incorrect reference to Tabarak Investment was removed from paragraph 9)
The news that broke on May 2 that the Securities and Commodities Authority of the United Arab Emirates had formed a forensic audit committee to investigate the scale of losses at Drake & Scull International will have been heartily welcomed by some of the unfortunate long term shareholders in the Dubai-based contracting company.
In recent years, they have witnessed the value of their holdings being massively eroded following several years of losses, a restructuring that wiped out three quarters of Drake & Scull’s share capital, and a suspension of the firm’s shares that has now lasted for six months, preventing shareholders from recouping any of the remaining value of their holdings.
Meanwhile, as Drake & Scull and its strategic shareholder Tabarak Investment are engaged in legal battles with former managers, the company remains starved of cash, with many longstanding employees going without salaries for months on end.
The SCA’s statement on May 2 said the newly-formed forensic audit committee would investigate “the reasons for (Drake & Scull’s) floundering financial position and accumulated losses”.
Drake & Scull said in a statement on May 6 it welcomed the authority’s decision and reaffirmed its full co-operation.
In another statement issued via the DFM on May 8 following its general assembly, Drake & Scull said that in response to requests from shareholders, it had handed over “some files related to questionable projects for the period 2009-16”, which is on top of 15 legal complaints that Drake & Scull had already filed to the public prosecutor for what it described as “offenses by members of the previous management during their tenure between 2009-2017”, which it said are still currently under review by the federal public prosecutor.
So what has gone wrong, and how likely is it that the latest restructuring attempt, announced in November 2018, can be pulled off?
In an attempt to find out, Zawya has trawled through publicly available information and interviewed several current and former members of management, most of whom spoke on condition of anonymity - either because they are still working for the firm, or because they have outstanding cases against it.
2008 IPO and the good years
The 15 legal complaints to the public prosecutor involve Drake & Scull acquisitions (of which there were many) which took place during a three-year period after its 2008 Initial Public Offering (IPO).
The company embarked on an IPO in July 2008 when it floated 55 percent of its shares and raised 1.198 billion UAE dirhams ($362.2 million). The prospectus filing showed that its then-CEO Khaldoun Tabari was the second-biggest shareholder of the remaining 45 percent, with an 8.25 percent stake. The First Dubai Corporation LLC was the biggest single shareholder, with 15.11 percent.
The timing of the IPO – at the tail end of a property boom in Dubai – meant that the offer was a huge success, and was 101-times oversubscribed.
Drake & Scull went on to acquire 82 percent of Passavant-Roediger, a German water and wastewater treatment specialist, in a 145 million dirhams deal in November 2009, followed by a string of related transactions. These included the purchase of 75 percent of Kuwait-based Drake & Scull International for Electrical Contracting in December 2009, of Drake & Scull International Qatar in April 2010, of Drake & Scull International Oman in May 2010 and a 65 percent stake in Drake & Scull Arabia in November 2010.
The complaint to the public prosecutor last year cited “questionable acquisitions by Drake & Scull of companies, belonging to members of the previous executive management in 2009-2011”, says a statement from Drake & Scull on April 30.
In a telephone interview with Zawya in late April, ex-CEO Tabari, who first bought a stake in Drake & Scull in 1998, said the related party transactions took place after the IPO because it was easier to list the UAE corporate entity and then acquire companies in each territory than it would have been to try to list a consolidated entity with operations in several countries.
Whether these companies had common shareholders or not, “they go through a process”, Tabari argued, adding that financial and legal due diligence were carried out on each deal by financial services provider Shuaa Capital and legal firm Al Tamimi & Co respectively, with evaluation by PwC as an independent third party.
“We bought these companies because at the time the market in the UAE was under tremendous duress, and we needed to expand. Saudi Arabia sounded like a good place to be at – Qatar, Kuwait etc,” Tabari said.
The former CEO has been at the centre of the Drake & Scull legal complaints. After the complaints were filed last year, an order was issued from the central bank freezing UAE bank accounts held by Tabari and his wife and a travel ban imposed, although he was out of the UAE at the time and has remained outside the country since.
Alongside the related party transactions, Drake & Scull also extended its reach. It was known as an MEP (mechanical, electrical, plumbing) subcontractor, fitting complex building systems for main contractors. But in March 2010 it announced contract wins for its own, newly-formed main contracting company in the UAE, Gulf Technical Construction Company (GTCC). This was followed in April 2011 by the 128 million riyal acquisition of International Centre for Contracting – a top-tier Saudi main contractor – and by the launch of main contracting capabilities in Qatar and Kuwait.
Also in 2011, the company announced the award of a project which Tabari described at the time as a “historical milestone” – a 2 billion riyal job for Saudi Aramco to complete the King Abdullah Petroleum Studies and Research Centre (KAPSARC).
From a financial point of view, the expansion push seemed to be working. The company hit a high point in 2013, reporting a profit to shareholders of 166.5 million dirhams on revenue of almost 4.9 billion dirhams.
But costs were escalating.
Its expansion into general contracting meant it was bidding for work with typically lower margins - 5-8 percent for main contractors in the region, compared to 11-14 percent enjoyed by MEP firms, but its overheads also grew. An analysis of net profit margins between 2009-14 showed a gradual decline from a high point of 15 percent in 2009, to just 2.1 percent in 2014, when the company declared a profit to shareholders of 100.7 million dirhams on revenue of 4.7 billion dirhams.
2015-2016: Losses, and first restructuring
However, as the oil price slumped from over $100 in September 2014 to below $30 by January 2016, the company started recording losses.
In 2015, the Saudi government halted payments to contractors and placed most government jobs (the main source of work in the kingdom) on hold, causing widespread hardship in the construction sector.
Drake & Scull cited challenging conditions, “particularly in our key market of Saudi Arabia” as it declared 2015 results showing an 826.6 million dirham loss on revenue of 4.2 billion dirhams.
KAPSARC had also become a problem. The company had said in its initial press release that work was expected to complete in August 2012 but the contract shot substantially over deadline and over budget.
The 2016 accounts, in which the company declared a further loss to shareholders of 732.9 million dirhams, show receivables worth more than 1.7 billion dirhams due from customers on “contracts which are under discussion and negotiation”. This was primarily a result of costs incurred on the Aramco contract, for which it had not received payment.
In total, the balance sheet for the year ending December 2016 showed net equity had dropped to 1.25 billion dirhams from total assets of 7.6 billion dirhams, which included 5 billion dirhams worth of receivables and 815 million dirhams worth of goodwill.
By this stage, Tabari had stepped down as CEO, with former Arcadis Middle East CEO Wael Allan hired initially as chief operating officer in April 2016 and then promoted to CEO in October 2016 to spearhead a restructuring. Allan’s plan, which was presented to banks, involved the firm pulling out of Saudi Arabia, Qatar and other markets, as well as retreating from civils contracting to concentrate on MEP work in the UAE. A downsizing began that saw staff numbers decline from a peak of over 30,000 at the end of 2015 to 18,000-19,000 by mid-2017, according to comments made by Allan to The National.
The plan also required new funding and Tabari, who was still on the board as vice-chairman, said that an approach was initially made to the company via its lawyers by Tabarak Investment in February 2017, with a restructuring proposal involving funding from the firm put to Drake & Scull’s board in May.
2017: Losses continue, and a new hope dashed
The deal involved wiping out three quarters of Drake & Scull’s share capital to expunge the 1.7 billion dirhams worth of losses incurred in 2015-16, allowing the firm to start with a clean slate. Tabarak Investment would also inject 500 million dirhams of fresh money which, when combined with the shares it bought from Tabari in June 2017, would give the firm a controlling (53 percent) stake in Drake & Scull.
The investment was announced at a press conference in the same month, during which Tabarak Investment’s CEO Ahmad Kilani pledged that it would provide more than the initial 500 million dirhams, if required.
“We’ve committed to whatever the company needs,” he said, according to The National.
Yet things soured quickly. Within two months, the company had fired Allan, whose departure was a sign of things to come. In less than two years since Allan’s departure, three more CEOs have arrived and departed, as well as two company chairmen. The firm’s most recent CFO lasted in his role for only two months.
Sources working within the company have said that the business has lacked two key ingredients that were necessary to revive its fortunes – consistency and cash. A directors’ report accompanying its 2017 accounts, which show a 1.18 billion dirham loss on revenue of 2.75 billion dirhams, said that “delays in collections affected our working capital and led to an increase in our debt level, which in turn resulted in higher finance costs”.
Although some new money came in (alongside Tabarak Investment’s injection, the company had sold its stake in a Palm Jumeirah project to a joint venture partner for 300 million dirhams in March 2017) many suppliers remained unpaid, sources told Zawya.
The company also failed to replace projects that had completed with a sufficient volume of new work, and was even removed from some existing projects – two contracts GTCC was carrying out for Nakheel were cancelled due to the firm’s failure to deliver, a source said. Nakheel declined to comment.
One source said that most of the senior managers brought in by Tabarak lacked the necessary qualifications in engineering or project management, while a former senior employee said that even hires who had the required experience were not at the company long enough to have an impact.
“It was hard to get continuity because people were starting and leaving straight away.”
Delayed salaries
Moreover, problems with delayed salaries that had begun prior to Tabarak Investment’s involvement started to intensify.
A former senior employee said that following Tabarak Investment’s takeover, newly-appointed executives initially began by reassuring staff.
“When they first came in (after the June 2017 announcement), (they said) ‘We're here to save the company, you will never have a delayed salary again’.
“That happened for a few months, but then it was the same again - delayed salaries, some people getting salaries and some not,” the ex-employee said.
“It was happening in Oman and Saudi for ages before it came across to the UAE,” he added. “I was at a Saudi office when the employees literally stormed the office. But that was happening on sites on a regular basis.”
2018: 4.5 bln dirhams in the red
The company’s 2018 accounts filed in April reveal the severity of the situation Drake & Scull is now facing.
After declaring a 4.5 billion dirham loss to shareholders in a single year, the balance sheet that was cleaned up 18 months ago now shows accumulated losses of over 4.9 billion dirhams, and a net deficit of 4.78 billion dirhams. Notes to the accounts also revealed that company operations in India and Oman went into liquidation, and that it had lost control of its subsidiary in Qatar.
Just as worrying is the string of disclaimers in the accounts by auditors EY, stating that it was “not provided with sufficient and appropriate audit evidence” to complete its audits of three subsidiaries, and that it was not able “to obtain all the required bank confirmations to verify the bank balances and related commitments and contingencies of the Group”.
War of words
Drake & Scull’s statement following publication of its accounts on April 30 argued that a report provided to it which formed the basis of the 2016 restructuring plan “was developed on false information of backlog value, misrepresented projects' profitability and percentage of completion”.
It also said the report omitted the scale of legal cases being faced by the company, “which far exceeded the 500 million dirhams injected by the strategic shareholder”, and cited the high level of uncollectable receivables and the company’s high debts.
The statement also said it would continue to “fully perform its duties to protect shareholders' rights, strive to prosecute previous management and take all necessary measures to transform Drake & Scull into a successful company with achievable returns to all shareholders”. Tabari rejected many of the claims made in the statement, highlighting the fact that the outstanding receivables to Aramco, and others, were declared in the 2016 accounts, months before Tabarak Investment’s cash injection into the company was finalised. He also said it was not impaired because it was not considered to be uncollectible, given that a case was being prepared for a claim to be filed to recover the money it was owed.
“But a claim, you have to pursue. You’ve got to fight for it,” he said. He also dismissed the assertion that the scale of legal claims against the company was hidden.
“For Tabarak to say ‘we are not aware’... they put in the bid in February and they closed in October. They put in two board members and they put in a CFO,” he said.
Drake & Scull also wrote off the entire amount of goodwill carried on its balance sheet of 844 million dirhams last year, which it said in the statement was “part of its commitment to transparency, responsibility and governance”.
Tabari argued that goodwill was tested each year with auditors during his period as CEO, and suggested the recent write-off may have been out of management’s hands.
“Contracting is about ownership. When you have five CEOs from 2016 when I left until now, how can you even begin to understand what is going on?
“What is goodwill? Goodwill is your ability to deliver, it is your ability to do work. If the auditor was putting pressure on them that you cannot put goodwill any more, I can understand,” he said.
Tabarak Investment’s own exposure to Drake & Scull has reduced. The company has gradually sold down stakes since taking over, and market data shows the largest shareholder in the company as being Ajman Bank, with a 13.06 percent share. The bank said in a filing on May 7 that it does not own the shares, but they are held as collateral against a loan to one of its clients.
Drift away
While the public prosecutor and the SCA pick through claims and counter-claims, it is the employees that continue to suffer.
Two members of staff who still work at the firm said their salaries are in arrears by six months, and documents seen by Zawya show that by the end of 2018 the company owed more than 220 million dirhams in unpaid salaries and end-of-service gratuity payments – more than 100 million dirhams of this is owed to employees in the UAE.
Many have simply left the firm and filed claims for the money they are owed, with the number of employees now having dwindled to around 4,400, one current employee said.
Another, who has more than a decade of experience at the firm, said that all of the savings he had built while working for the firm were now gone, and that he has no confidence of receiving the outstanding salary or the gratuity he is owed, given that ex-colleagues who have taken the company to court for dues they are owed have won their cases but not received payment.
“I know so many people who have judgements but have never received payments,” he said.
He said that many longstanding employees were instilled with renewed faith when the company announced in January that Tawfiq Abu Soud was returning as CEO. Abu Soud had previously spent 17 years at the firm and was head of its water division at the time of the IPO. However, within three months he was also gone – a company announcement on April 24 said his services had been terminated. When contacted by Zawya, Abu Soud said that he was only employed in a three-month consultancy capacity. He said he had contacted both the company and DFM to clarify this point, but declined to comment further.
“Of all the CEOs we've seen, Tawfiq brought big hope,” said the current employee. “His return had a major impact on old employees, who believed that he would only have returned if he believed that there was a chance to turn it around. With his departure, nobody has any hope anymore.”
Tabarak Investment and Drake & Scull were both contacted by Zawya. Tabarak Investment referred all queries put to it to Drake & Scull. Drake & Scull did not respond to requests to comment, but public statements recently issued by the company indicate that it still believes a turnaround is possible.
In its recent statement issued on May 8, the company said in an update on its restructuring plan that it “has already started working with the bank committee and its consultants to find solutions that would support the company”, which includes closing certain branches and subsidiaries, as well as renegotiating debts with bankers and suppliers.
“These negotiations aim ultimately to support the continuity of the company and protect the rights of shareholders”, it said.
(Reporting by Michael Fahy; Editing by Emmy Abdul Alim)
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