New company to register on the DIFC
The secrecy in which Solidere has enshrouded its second life is lifting and the facts are beyond what the company had let on since last November when it first acquired shareholder approval to venture outside of the confines of the Beirut Central District.
It has been known since last year that Solidere was preparing its "coming out." Solidere International (SI) will be registered at the Dubai International Financial Center with capital of just over $700 million (representing a share valuation of $770 million). Solidere will have a 37.2% stake with management control and the ability to consolidate SI results into its books.
Everyone wants a piece of SI
These were the highlights of the ultimate investment plan which Solidere chairman and CEO Nasser Chammaa put in front of shareholders last month, asking for and getting, authorization to pour $216 million of company cash into the SI capital through a private placement in order to gain the controlling stake that the Lebanese company sought.
Besides the cash contribution, Solidere also has equity in SI as its sole founding shareholder with 1 million shares. Documents show that this stake was boosted from $50,000, or 5 cents per share, to $70 million, or $70 per share, in valuation since Solidere assigned to SI its portfolio of international projects (both signed and under negotiations) along with 25-year rights to using the Solidere brand name outside of Lebanon. This added contribution settles the total valuation of Solidere's interest in SI at $286.4 million.
The over $485 million in remaining SI capital has been sourced from investors who signed for shares in the private placement, which was lead-managed by Egypt's investment bank, EFG Hermes. During the one-month final promotion and subscription period for the private placement from May 18, demand was high, exceeding the capital sought. "Demand was a little over $950 million for the $700 million," said Karim Awad, executive director at EFG Hermes Investment Bank, told Executive.
Awad said the majority of appetite for the placement came from regional investors and funds from western countries. Besides citing unspecified "significant demand from western institutions," he named Lebanon, Saudi Arabia, Kuwait, and Qatar as originating countries for subscriptions in the private placement.
While Awad would not divulge names or contribution sizes of SI investors, Qatar's Salam International Group has made no secret of its ambition for a piece of the pie. The group, which among other things has activities in real estate and construction, authorized an SI investment at $6 million. Presumable the biggest single shareholder apart from Solidere is a major Saudi investor, who early on pitched in $180 million, Chammaa revealed at the shareholder assembly.
According to the information Executive could acquire ahead of the company's big announcement of establishing SI scheduled for June 30, after this issue went to print the new company is seeking to engage in three areas of activity: urban planning; development of land and real estate; and hospitality projects and hotel management.
Many specifics on the three intended fields of business or corporate departments of SI are still confidential but Solidere already has projects in each of the three areas in its pipeline, giving a hint of its regional and international possibilities. What can be deduced from official Solidere papers obtained for Executive is that the projects are diverse, complex structures in operational and financial engineering.
The three known projects which Solidere already discussed earlier in 2007 are the Al-Zorah project in the smallest UAE emirate, Ajman, and the agreement with Egyptian firm Sodic for two urban centers in the Greater Cairo region: Katameya and Sheikh Zayed. When the Ajman project was first announced in January, ambiguous information provision led to reports of a $6.8 billion investment participation by Solidere in equal partnership with the local government.
Information currently being presented by the designated CEO of SI, Mounib Hammoud, showed that the Al-Zorah project is in fact an equal partnership between the emirate and the private sector with a 50% stake holding by SI and co-investors, of which SI's share will be 25%. The company developing Al-Zorah as Ajman's a new seaside urban core, will be capitalized at $1.1 billion (AED 4 billion), of which 53% will be an in-kind contribution of some 12 million square meters of land by the government.
SI will be handed a 3% stake directly from the emirate as free equity stake and will solicit 25% of the total capital from co-investors at a premium to par, in lieu of arrangement fees. SI's direct capital contribution to the Ajman project company will thus require supplying a 22% stake from cash, for which the company will use proceeds from its private placement ($212 million according to the corporate document,) and fee revenues collected from co-investors. Expected SI revenues from Al-
Zorah will include 4% of annual profits, property management fee income, and proceeds from sales or leases of land and real estate with a total internal rate of return projection for SI equity at 32%.
In the Egyptian partnership, Solidere has entered into agreements with real estate developer Sodic to masterplan, develop and property manage the two Cairo projects. Sodic 6th of October Development & Investment to give it its full name, is a company with partial government ownership and ambitious projects. As remuneration for its troubles in developing two of these projects for Sodic and adding the Solidere brand name to the marketing mix, SI will be eligible to claim fees of between 7% and 10% on the value-added in land and real estate sales and leases and have options to acquire one plot in each project at a preset (lower) benchmark price. All in all, the package represents $64 million in projected revenues for SI.
Partnerships make up bulk of in-kind contribution
As the Ajman and Sodic partnership agreements were negotiated and signed by Solidere, they constitute the bulk of the company's in-kind contribution to the capital of SI, assessed by Solidere as a $70 million value. Solidere reasoned this as an 85% discount on the valuation for the rights on the two signed projects, with the company's brand name and expertise thrown in moreover as freebies for an irresistible package.
But marketers of irresistible offers always add even more much more, all for the same excellent value. In the SI proposition, this includes memoranda of understanding, a short-listed project bid, and a pipeline of potential projects. Of the MoUs, the most important one is for construction of a resort in the Turkish vacation region of Bodrum, foreseeing an SI equity stake of 50% in a joint venture to own over 250,000 square meters of land and develop residential units and hotels, for which SI planners earmarked an investment of $45 million from the private placement proceeds.
A second MoU is in the hospitality business, where SI plans are to create a unit called Solidere International Hotels and Resorts (SIHAR). This subsidiary would be capitalized with $25 million and it has preliminary understanding with international partners for developing and managing hotels and resorts under the name Nikki Beach, a Florida-born brand with a flavor of Miami Vice and a claim to jet-set luxury. One partner in this venture, aiming to run five to ten hotels in the Mediterranean and Gulf countries, reportedly would be Jihad El Khoury, Marbella-based entrepreneur.
Then there is a bidding partnership between Solidere and French group Vinci Construction in a tender for land reclamation and development project in Monaco with expected cost of around 2 billion euros. If this consortium wins the project against four other pre-qualified bidders, it would give SI its first attention-commanding project in a European real estate hotspot, even if the SI stake so far undisclosed by Solidere in the project company would be less than 50%. To round it all off, Solidere said it has projects in Saudi Arabia in its pipeline and has been exploring opportunities in Oman, Algeria, Morocco, and Croatia.
There can be little doubt that after and perhaps even before Solidere's management team received shareholder approval to amend the corporate bylaws, the company has rapidly made overtures to high-
octane partners in the urban development business and become touchy-feely with a broad circle of important public sector leaders, well-placed construction companies, resort developers and hospitality entrepreneurs.
Take Vinci for example: the French partner in the Monaco landfilling and real estate consortium, has carried out three significant projects in Monaco in the past and has extensive experiences in the Middle East and the Mediterranean with completed projects on the Arab peninsula, although many date back to the third quarter of the 20th century. Vinci's most recent big contract in the region is participation in a consortium for the third line of Cairo's subway, signed this year.
In Awad's view, the Solidere name has greatly helped the genesis of these relationships. Sodic, for example, brought Solidere into its project specifically because of its branding power, he said, adding that the creation of the international unit in Dubai also emphasized the company's capabilities while at the same time did not scare off investors wary of the risks associated with the parent company's home base in Lebanon. "The new company will capitalize on the good points, the capabilities and brand name, without the political risk," Awad cheered.
Even without the hardships of the past 12 months that have beset Lebanon and left their mark on the Beirut Central District (BCD), Solidere's most famous urban project to date, the company's desire for a new life in the larger world is a highly rational move, given that its original mandate for reconstruction of the BCD limited its geographic reach and necessitated a shrinking scope of activities as the area's land bank was finite.
Although private equity investors should be able to reap the potential rewards of SI's growth and exposure outside Lebanon, local shareholders, many of whom have suffered highs and lows since the Solidere shares were issued in 1996, question how much and when they will be able to benefit financially from the creation of SI. Chammaa sweetened his request that shareholders should authorize committing $216.4 million of capital to the creation of SI, with a dividend announcement of $1 per share for the parent company an amount exceeding the $0.84 earnings per share from net profits stated in the 2006 annual report. The dividend for the very successful 2006 is the largest since the company's listing on the Beirut Stock Exchange and more than 50% higher than last year's payout; some shareholders still called it a bitter pill that management had pushed the payout date to September and did not elaborate on the rewards small share owners can expect from their investment.
Furthermore, the 2006 annual report which provides ample urban design details, architects commissioned for individual projects and revised downtown zoning was less expansive on the benefits Solidere shareholders could expect for from SI, mentioning the plan only in one paragraph of the introduction and in the concluding words of the chairman's letter to shareholders as promise that external projects will offer new sources of revenue "while avoiding to invest any of your cash abroad."
SI has a great opportunity to develop business but it will have to prove itself in a region where other companies are also seeking to exploit their planning expertise and increase project experience. Solidere may have demonstrated its abilities and resilience but for years has also had the luxury of being pampered as the only fish in the sea.
Transparency remains an issue
While it has earned high grades for financial engineering in the past three years, Solidere also has chronic transparency problems both with the public and stakeholders. "The company makes all kinds of land deals without disclosing them and does not at all meet our expectations on transparency," said a Beirut-based financial analyst. Solidere has also gained a reputation for firing blanks when dealing with the public and its media spokespersons rarely bestow reporters with answers to their relevant questions.
The new venture will encounter more stringent public scrutiny when it expands into highly visible projects in Europe. Well-capitalized real estate companies and hotel management firms in the Middle East are on the rise and this should give SI great performance incentives through competition. But the company may also find good partners and business companions in firms with similar perspectives, for example Jordan's public sector-held Mawared corporation which is a joint owner (with the Saudi Oger group) in Amman's Abdali urban regeneration project and which plans urban planning and consulting activities similar to those of SI through a new entity called Mawared International.
Whatever course SI charts in its first years on the international stage, Awad is sure that the new company has "a great upside potential." Investors in the SI private placement can also be clear about their exit options with a time horizon of two to three years for a likely initial public offering (unless they decide to sell on the secondary market) .
Awad explained the timeline of the IPO and the fact that SI, while not entirely a startup company because of its signed contracts, will need to mature before going public. The DIFX, the bourse associated with the DIFC where SI is incorporated, will be the "logical choice" to list "but nothing would prevent us from listing elsewhere," he said, adding considerations are still far from a point of decision.
Executive 2007
