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(Cumulative net profit figures for ADFG and Shuaa in paragraph 11 were corrected. A cumulative earnings figure was added).
The combined entity set to be created between the merger of Abu Dhabi Financial Group and Dubai-based Shuaa Capital will look at doing deals to spark further consolidation in the sector, if they make sense, the chief executive of Abu Dhabi Financial Group has said.
Speaking on a call with journalists following an announcement of the terms of the ADFG/Shuaa deal, chief executive officer Jassim Alseddiqi said any further acquisitions would be “opportunistic”.
“If we see an opportunity, something which is value accretive to shareholders, of course we will go ahead with that,” he said, adding that the structure of such deals would be decided as they emerge.
ADFG and Shuaa Capital announced the terms of the reverse takeover on Wednesday morning after the deal gained approval from Shuaa’s board on Tuesday.
The deal values Shuaa Capital 1.13 billion dirhams ($302.8 million), which is a 60 percent premium to the company’s closing price the day before news of the deal first broke. The combined entity is valued at around 2.54 billion dirhams.
It will be achieved by Shuaa Capital issuing 1,065,000,000 new shares, bringing the total number of shares to 2,535,720,000 shares.
This will mean Shuaa shareholders will hold 42 percent of the combined entity, while ADFG’s strategic shareholder, Abu Dhabi Capital Management, will hold 58 percent.
“The valuation provided by the independent valuer was more than 58 percent for ADFG,” Alseddiqi told journalists. It decided to reduce this because “we wanted to send a positive signal to the market”, he said.
Prior to the deal, ADFG was already the biggest single shareholder in Shuaa Capital, with a 48.36 percent stake.
The combined entity will have 12.8 billion dirhams worth of assets under management, of which 11.5 billion dirhams worth is currently under ADFG’s management. A joint statement issued by both firms put the combined entity’s pro-forma revenue at 568 million dirhams, and its net income of 135 million dirhams. Again, the bulk of this is being contributed by ADFG. A presentation to investors comparing net income (after ADFG’s contribution to Shuaa and other, one-off items) shows ADFG declared a net profit of 139 million dirhams, compared to Shuaa’s net income of 27 million dirhams (statutory figures show Shuaa declared a net loss of 29 million dirhams last year).
Over a three-year period from 2015-18, the methodology used in the investor presentation shows ADFG achieved cumulative earnings before interest, tax, depreciation and amortisation of 563 million dirhams, whereas Shuaa Capital’s combined earnings loss in the same period stood at 79 million dirhams. Cumulative net profit in the three-year period was 454 million dirhams, whereas the cumlative net loss for Shuaa stood at 222 million dirhams.
Strength in numbers
Alseddiqi said, however, that he expects the combined entity to achieve “revenue synergies” by cross-selling to each other’s clients.
“This firm will be focusing on asset management and investment banking - both of which ADFG and Shuaa are pioneers in the region,” he said. “We will have between us over 12,500 which we can cross-sell to.”
The combined entity will remain listed on Dubai Financial Market (DFM) and is expected to be rebranded as ADFG, but the Shuaa brand will be kept for certain activities, such as the Shuaa Securities business.
Alseddiqi will be chief executive of the enlarged group, which has 380 employees, while Shuaa Capital’s current CEO Fawad Tariq-Khan will become head of investment banking.
Alseddiqi that an operational integration plan for the business is likely to take around 12 months to complete, but stressed that the focus would be on expanding market share as opposed to cutting costs.
“This is a very important message from us. This is a revenue synergy rather than a cost synergy play,” he said.
Shuaa Capital’s shares closed 3.3 percent higher at 0.959 dirhams per share on Wednesday. The company declared a 24.9 million dirham loss to shareholders during the first quarter of 2019. It has some exposure to investments in funds managed by collapsed Dubai private equity fund Abraaj Capital, but Alseddiqi described this as “a legacy investment, a very small investment” representing less than 5 percent of Shuaa’s assets.
The reverse takeover now needs to be approved by Shuaa Capital’s shareholders at a meeting set for July 11th as well as approval from regulators, which is expected by the end of October.
“The combination of two such entities with two different activities that are complementary is creating a powerhouse that will serve the region whether on the investment banking or whether on the asset management side. We think our bouquet of services... is unmatched in the region,” Alseddiqi said.
Issam Kssabieh, a senior analyst at Menacorp, told Zawya in a telephone interview on Thursday that the deal “makes perfect sense”.
Easy access
He said the reverse takeover meant ADFG had relieved itself of the pressure of embarking on an initial public offering for its shares, most notably in terms of market liquidity.
“The IPO history over the past couple of years (in the region) has been really terrible. Companies that have listed haven’t done so well in terms of stock price movement.”
He said that the terms of this deal meant the current valuation for ADFG is “very conservative”.
“ADFG is a very aggressive, local player that loves acquisitions and has very influential people on its board that can make deals happen, especially at a time where merger and acquisition activity in the Middle East has been rising,” Kassabieh said.
He said he expects consolidation in the financial sector to spread from banks into other financial services businesses, such as private banks and equity brokerages.
“If you look at the DFM, for instance, you will see that the number of brokerages has decreased year-on-year. This is primarily through consolidation because it is getting tougher to capture market share year-on-year,” Kassabieh said.
(Reporting by Michael Fahy; Editing by Mily Chakrabarty)
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