Merger with United Tower Holding Company, an associate, and Al Dhiyafa Holding Company, a subsidiary, will have some positive implications for United Real Estate Company
United Real Estate Company (URC) signed a Memorandum of Understanding (MoU) last year concerning the proposed amalgamation with United Tower Holding Company (UTHC) and Al Dhiyafa Holding Company (DHC). URC will be the merging entity with UTHC and DHC being the merged entities. The necessary regulatory approvals have been obtained and Extraordinary General Assembly Meetings have been scheduled separately for each of these companies for later this month to formally approve the merger.
UTHC was established in 2006 with a core business focus on real estate investment and development activities. Its property portfolio includes Al Shaheed Tower, City Tower and KIPCO Tower, all located in Kuwait’s Sharq business district and the Marina Plaza in Salmiya. DHC was established in 2005 and manages several subsidiaries in Lebanon and Egypt. The Company’s portfolio of assets and businesses includes Safir Bhamdoun Hotel and Raouche View 1090 in Lebanon, and Hilton Cairo Helipolis & Waldorf Astoria Hotel in Egypt.
The merger is a non-cash transaction and the share swap ratio has been set at 0.64 URC shares for every UTHC share and 0.58 URC shares for every DHC share. In August last year, URC’s AGM approved an increase in capital of KWD24.3mn, which represents the net asset value of the merged entities. This capital increase was also approved by the Kuwait Capital Markets Authority.
URC anticipates that the merger to be completed by year-end 2022. Based on H1 22 pro forma figures, the merger will result in a sizeable (17%) increase in URC’s consolidated asset base due primarily to a substantially larger portfolio of investment properties. The latter relates to the inclusion of the office towers of UTHC, which would boost the proportion of income generating properties to close to half of URC’s asset base and further diversify holdings by property type. Both of these changes are seen as being positive factors for the Company. While concentration by individual holding will increase, this will remain mitigated by the good occupancy rates of income generating properties, as well as diversification by property type and geography. The overall asset composition of the merged entity will remain stable, with investment properties and hotels comprising the bulk of its asset base.
The consolidation of the borrowings of UTHC will, however, increase the overall debt at URC (by 19%) but the currently good debt maturity profile will be maintained. An offsetting positive is the strengthening of URC’s capital base (by 18%); this will give a modestly improved debt equity ratio of 1.59 times compared to 1.63 times pre-merger. Leverage is expected to decline to 2.09 times from 2.23 times pre-merger, but will nevertheless remain high.
Another positive impact of the merger is the rise in rental income (+37%) which will improve the quality and sustainability of URC’s core operating income. However, earnings will remain subject to the level of amortisation and/or depreciation of the Company’s investment properties. In this regard, a significant positive factor is the intention of URC to use the substantial non-cash gain arising from the merger (in line with the agreed share swap rate) to offset a large proportion of the outstanding cost due on the Marina World BOT development. This would eliminate one of the major current overhangs which limit the Company’s earnings. Nonetheless, the high level of borrowings and consequent high finance costs will limit net profit growth and this will remain a key constraint on URC’s earnings.
Contact
Agnes Seah
Senior Credit Analyst
E-mail: agnes.seah@ciratings.com