The secrecy in which Solidere has enshrouded its second lifeis lifting and the facts are beyond what the company had leton since last November when it first acquired shareholderapproval to venture outside of the confines of the BeirutCentral District.
It has been known since last year that Solidere waspreparing its “coming out.” Solidere International (SI) willbe registered at the Dubai International Financial Centerwith capital of just over $700 million (representing a sharevaluation of $770 million). Solidere will have a 37.2% stakewith management control and the ability to consolidate SIresults into its books.
Everyone wants a piece of SI
These were the highlights of the ultimate investment planwhich Solidere chairman and CEO Nasser Chammaa put in frontof shareholders last month, asking for and getting,authorization to pour $216 million of company cash into theSI capital through a private placement in order to gain thecontrolling stake that the Lebanese company sought.
Besides the cash contribution, Solidere also has equity inSI as its sole founding shareholder with 1 million shares.Documents show that this stake was boosted from $50,000, or5 cents per share, to $70 million, or $70 per share, invaluation since Solidere assigned to SI its portfolio ofinternational projects (both signed and under negotiations)along with 25-year rights to using the Solidere brand nameoutside of Lebanon. This added contribution settles thetotal valuation of Solidere’s interest in SI at $286.4million.
The over $485 million in remaining SI capital has beensourced from investors who signed for shares in the privateplacement, which was lead-managed by Egypt’s investmentbank, EFG Hermes. During the one-month final promotion andsubscription period for the private placement from May 18,demand was high, exceeding the capital sought. “Demand was alittle over $950 million for the $700 million,” said KarimAwad, executive director at EFG Hermes Investment Bank, toldExecutive.
Awad said the majority of appetite for the placement camefrom regional investors and funds from western countries.Besides citing unspecified “significant demand from westerninstitutions,” he named Lebanon, Saudi Arabia, Kuwait, andQatar as originating countries for subscriptions in theprivate placement.
While Awad would not divulge names or contribution sizesof SI investors, Qatar’s Salam International Group has madeno secret of its ambition for a piece of the pie. The group,which among other things has activities in real estate andconstruction, authorized an SI investment at $6 million.Presumable the biggest single shareholder apart fromSolidere 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 aheadof the company’s big announcement of establishing SI —scheduled for June 30, after this issue went to print — thenew company is seeking to engage in three areas of activity:urban planning; development of land and real estate; andhospitality projects and hotel management.
Many specifics on the three intended fields of business orcorporate departments of SI are still confidential butSolidere already has projects in each of the three areas inits pipeline, giving a hint of its regional andinternational possibilities. What can be deduced fromofficial Solidere papers obtained for Executive is that theprojects are diverse, complex structures in operational andfinancial engineering.
The three known projects which Solidere already discussedearlier in 2007 are the Al-Zorah project in the smallest UAEemirate, Ajman, and the agreement with Egyptian firm Sodicfor two urban centers in the Greater Cairo region: Katameyaand Sheikh Zayed. When the Ajman project was first announcedin January, ambiguous information provision led to reportsof a $6.8 billion investment participation by Solidere inequal partnership with the local government.
Information currently being presented by the designatedCEO of SI, Mounib Hammoud, showed that the Al-Zorah projectis in fact an equal partnership between the emirate and theprivate sector with a 50% stake holding by SI andco-investors, of which SI’s share will be 25%. The companydeveloping Al-Zorah as Ajman’s a new seaside urban core,will be capitalized at $1.1 billion (AED 4 billion), ofwhich 53% will be an in-kind contribution of some 12 millionsquare meters of land by the government.
SI will be handed a 3% stake directly from the emirate asfree equity stake and will solicit 25% of the total capitalfrom co-investors at a premium to par, in lieu ofarrangement fees. SI’s direct capital contribution to theAjman project company will thus require supplying a 22%stake from cash, for which the company will use proceedsfrom its private placement ($212 million according to thecorporate document,) and fee revenues collected fromco-investors. Expected SI revenues from Al-Zorah will include 4% of annual profits, property managementfee income, and proceeds from sales or leases of land andreal estate — with a total internal rate of returnprojection for SI equity at 32%.
In the Egyptian partnership, Solidere has entered intoagreements 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 fullname, is a company with partial government ownership andambitious projects. As remuneration for its troubles indeveloping two of these projects for Sodic and adding theSolidere brand name to the marketing mix, SI will beeligible to claim fees of between 7% and 10% on thevalue-added in land and real estate sales and leases andhave 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-kindcontribution
As the Ajman and Sodic partnership agreements werenegotiated and signed by Solidere, they constitute the bulkof the company’s in-kind contribution to the capital of SI,assessed by Solidere as a $70 million value. Soliderereasoned this as an 85% discount on the valuation for therights on the two signed projects, with the company’s brandname and expertise thrown in moreover as freebies for anirresistible package.
But marketers of irresistible offers always add even more— much more, all for the same excellent value. In the SIproposition, this includes memoranda of understanding, ashort-listed project bid, and a pipeline of potentialprojects. Of the MoUs, the most important one is forconstruction of a resort in the Turkish vacation region ofBodrum, foreseeing an SI equity stake of 50% in a jointventure to own over 250,000 square meters of land anddevelop residential units and hotels, for which SI plannersearmarked an investment of $45 million from the privateplacement proceeds.
A second MoU is in the hospitality business, where SIplans are to create a unit called Solidere InternationalHotels and Resorts (SIHAR). This subsidiary would becapitalized with $25 million and it has preliminaryunderstanding with international partners for developing andmanaging hotels and resorts under the name Nikki Beach, aFlorida-born brand with a flavor of Miami Vice and a claimto jet-set luxury. One partner in this venture, aiming torun five to ten hotels in the Mediterranean and Gulfcountries, reportedly would be Jihad El Khoury,Marbella-based entrepreneur.
Then there is a bidding partnership between Solidere andFrench group Vinci Construction in a tender for landreclamation and development project in Monaco with expectedcost of around 2 billion euros. If this consortium wins theproject against four other pre-qualified bidders, it would give SI its first attention-commanding project in a European real estate hotspot, evenif the SI stake — so far undisclosed by Solidere — in theproject company would be less than 50%. To round it all off,Solidere said it has projects in Saudi Arabia in itspipeline and has been exploring opportunities in Oman,Algeria, Morocco, and Croatia.
There can be little doubt that after — and perhaps evenbefore — Solidere’s management team received shareholderapproval to amend the corporate bylaws, the company hasrapidly made overtures to high-octane partners in the urban development business and becometouchy-feely with a broad circle of important public sectorleaders, well-placed construction companies, resortdevelopers and hospitality entrepreneurs.
Take Vinci for example: the French partner in the Monacolandfilling and real estate consortium, has carried outthree significant projects in Monaco in the past and hasextensive experiences in the Middle East and theMediterranean with completed projects on the Arab peninsula,although many date back to the third quarter of the 20thcentury. Vinci’s most recent big contract in the region isparticipation in a consortium for the third line of Cairo’ssubway, signed this year.
In Awad’s view, the Solidere name has greatly helped thegenesis of these relationships. Sodic, for example, broughtSolidere into its project specifically because of itsbranding power, he said, adding that the creation of theinternational unit in Dubai also emphasized the company’scapabilities while at the same time did not scare offinvestors wary of the risks associated with the parentcompany’s home base in Lebanon. “The new company willcapitalize on the good points, the capabilities and brandname, without the political risk,” Awad cheered.
Even without the hardships of the past 12 months that havebeset Lebanon and left their mark on the Beirut CentralDistrict (BCD), Solidere’s most famous urban project todate, the company’s desire for a new life in the largerworld is a highly rational move, given that its originalmandate for reconstruction of the BCD limited its geographicreach and necessitated a shrinking scope of activities asthe area’s land bank was finite.
Although private equity investors should be able to reapthe potential rewards of SI’s growth and exposure outsideLebanon, local shareholders, many of whom have sufferedhighs and lows since the Solidere shares were issued in1996, question how much and when they will be able tobenefit financially from the creation of SI. Chammaasweetened his request that shareholders should authorizecommitting $216.4 million of capital to the creation of SI,with a dividend announcement of $1 per share for the parentcompany — an amount exceeding the $0.84 earnings per sharefrom net profits stated in the 2006 annual report. Thedividend for the very successful 2006 is the largest sincethe company’s listing on the Beirut Stock Exchange and morethan 50% higher than last year’s payout; some shareholdersstill called it a bitter pill that management had pushed thepayout date to September and did not elaborate on therewards small share owners can expect from their investment.
Furthermore, the 2006 annual report — which provides ampleurban design details, architects commissioned for individualprojects and revised downtown zoning — was less expansive onthe benefits Solidere shareholders could expect for from SI,mentioning the plan only in one paragraph of theintroduction and in the concluding words of the chairman’sletter to shareholders as promise that external projectswill offer new sources of revenue “while avoiding to investany of your cash abroad.”
SI has a great opportunity to develop business but it willhave to prove itself in a region where other companies arealso seeking to exploit their planning expertise andincrease project experience. Solidere may have demonstratedits abilities and resilience but for years has also had theluxury of being pampered as the only fish in the sea.
Transparency remains an issue
While it has earned high grades for financial engineeringin the past three years, Solidere also has chronictransparency problems both with the public and stakeholders.“The company makes all kinds of land deals withoutdisclosing them and does not at all meet our expectations ontransparency,” said a Beirut-based financial analyst.Solidere has also gained a reputation for firing blanks whendealing with the public and its media spokespersons rarelybestow reporters with answers to their relevant questions.
The new venture will encounter more stringent publicscrutiny when it expands into highly visible projects inEurope. Well-capitalized real estate companies and hotelmanagement firms in the Middle East are on the rise and thisshould give SI great performance incentives throughcompetition. But the company may also find good partners andbusiness companions in firms with similar perspectives, forexample Jordan’s public sector-held Mawared corporation which is a joint owner (with theSaudi Oger group) in Amman’s Abdali urban regenerationproject and which plans urban planning and consultingactivities similar to those of SI through a new entitycalled Mawared International.
Whatever course SI charts in its first years on theinternational stage, Awad is sure that the new company has“a great upside potential.” Investors in the SI privateplacement can also be clear about their exit options with atime horizon of two to three years for a likely initialpublic offering (unless they decide to sell on the secondarymarket) .
Awad explained the timeline of the IPO and the fact thatSI, while not entirely a startup company because of itssigned contracts, will need to mature before going public.The DIFX, the bourse associated with the DIFC where SI isincorporated, will be the “logical choice” to list “butnothing would prevent us from listing elsewhere,” he said,adding considerations are still far from a point ofdecision.