The rise and fall, and rise again, of Drake & Scull

Drake & Scull International, the contractor that in its heyday worked on projects such as Louvre Abu Dhabi, aims to make a comeback on the trading floor of the Dubai Financial Market after a hiatus of more than five years.

That the company has taken so long to secure the approval of the bourse and market regulator, the Securities and Commodities Authority, speaks volumes of the struggle it has endured in that period.

After long-drawn debt negotiations with its lender, as well as with its trade creditors, a series of court cases, a complete managerial revamp and two complex capital restructurings in the past decade, the company says it is now on the right path.

Drake & Scull has made “great progress during this important phase of bringing the company back stronger”, chairman Shafiq Abdelhamid said on Wednesday.

The next step is to hold a General Assembly meeting on March 27 to seek the approval of shareholders for the resumption of trading and to increase the company's share capital.

The shareholders' meeting agenda includes “other strategic topics related to the company’s future plans and growth”, Drake & Scull said on Wednesday, without revealing what it intends to discuss.

But in the meantime, its investors are holding their collective breath to see what the stock performance will be and if they will be able to recover their long-held investments when the company eventually starts trading again.

Long history

Drake & Scull, which offers general contracting and engineering services and undertakes projects in the oil and gas, and water treatment sectors, has a history in the region dating back to 1966 when it first set up a base in Abu Dhabi.

It has offices in the UAE, Kuwait, Egypt, Jordan, Algeria and India, and manages projects in Europe as well as parts of North Africa.

Khaldoun Tabari, a Jordanian businessman who took a majority stake in the company in 1998, led it to public listing in 2008, offering 55 per cent of its shares in a deal that was 101 times oversubscribed.

The company was a preferred engineering and contracting partner for high-profile projects in the UAE and was among the most-traded stocks on the bourse before being suspended.

Hard time

Drake & Scull fell on hard times during the three-year oil price slump from 2014, heavily affecting the property and construction sector in the region.

In the severe liquidity crunch that followed, many construction companies across the region laid off tens of thousands of workers as payments dried up.

After its IPO, the company expanded operations aggressively and went on an acquisition spree, including in Syria and Libya.

However, geopolitical volatility and security concerns wiped out business in Syria and Libya. Its inability to receive payments from government and private-sector companies post the 2014 slump also contributed to the severe financial crunch it faced at the time.

The company declared losses of Dh826.6 million ($225 million) in 2015 and Dh732.9 million in 2016, leading to Mr Tabari stepping down as chief executive in August 2016.

Restructuring

Wael Allan, who took over the role of chief executive from Mr Tabari, developed a turnaround plan that involved attracting new investment.

A deal agreed with private equity firm Tabarak Investment Company included Drake & Scull reducing its share capital by 75 per cent to extinguish accumulated losses of Dh1.7 billion, wiping the slate clean ahead of a Dh500 million equity injection. Mr Tabari agreed to sell his shares in February 2017 as part of the process.

The new funding eventually came in October 2017 and although the company declared a profit for the first quarter of 2018, hopes of a revival faded quickly.

A decline in fortunes led to a loss of Dh4.5 billion on revenue of Dh798 million in 2018, leaving the company with negative net equity of almost Dh4.75 billion.

Trading in shares was suspended in November 2018 after the heavy financial losses.

Legal drama

The past decade for Drake & Scull has been fraught with legal drama involving suits and counter-lawsuits as its management was accused of falsely inflating asset prices before its IPO.

The company filed 15 charges to the UAE public prosecutor dating back to its 2008 IPO as well as on “questionable acquisitions by Drake & Scull of companies belonging to members of the previous executive management in 2009-2011”, it said in an April 2019 statement.

In 2020, the management at the time said it had filed fresh criminal charges with the Abu Dhabi Public Funds Prosecutor against Mr Tabari, his family members and other executive managers.

While Mr Tabari said he was the subject of a “smear campaign” and blamed the company for a “clear lack of strategy”, Drake & Scull refuted his claims.

Restructuring part two

Last year, the company announced intentions to write off 90 per cent of its debts and convert the remaining 10 per cent into mandatory convertible sukuk as part of a restructuring plan.

Drake & Scull obtained approval from creditors who account for 67 per cent of the company's total debt value, exceeding the threshold needed for the restructuring plan under the UAE's Bankruptcy Law, the firm said at the time.

In 2022, Drake & Scull completed its restructuring plan after achieving the required voting percentage from its 600-plus creditors for consensual agreement.

In November last year, it received a reprieve from the Dubai Court Appeals and was granted 12 months to introduce the restructuring plan.

The court also stopped “all judicial procedures against the company and its subsidiaries, as well as ceasing all execution procedures”, it said at the time.

What's next?

With its legal wrangles behind it, the company is now focused on finding the right trajectory of growth with the backing of shareholders.

“The overall road map for a proper recovery seems strong, post the Dubai Courts approved plan last November,” said Vijay Valecha, chief investment officer at Dubai-based Century Financial.

“With the entire old management guard now out, the focus is on how well the new board installs the investor confidence.”

Drake & Scull said it was increasing the company share capital by “no less than Dh300 million, as outlined in the court-approved restructuring plan”.

“Looking at the overall share prospects, the road to recovery will be a long-drawn affair, which would come with its own set of hurdles,” Mr Valecha said.

The company reported higher net losses in 2023 compared to the previous year, despite a rise in revenue.

Its total net loss for the year reached Dh352.1 million compared to Dh224.3 million for the same period the previous year, its recent financial statement showed.

Revenue rose to Dh93.8 million last year, up 16 per cent annually.

The resumption of trading “could not have come at a better time with oil prices and the overall GCC markets infrastructure sector sentiment holding strong”, Mr Valecha said.

“Patience would be the key for investors wanting to enter this stock.”

Drake & Scull, which was once a regional pioneer in the mechanical, engineering and plumbing segment, has lost some of its key clients “owing to its controversies in the past”, so landing the new contracts would be the key to progression, Mr Valecha added.

Junaid Ansari, head of investment strategy and research at Kamco Invest, said growth prospects for the company were bright given the construction boom in the UAE.

“We believe this is the right time for construction companies to benefit from the significant demand for real estate in the UAE, especially in Dubai, with the market seeing significant undersupply,” he said.

“Contracts awarded in the UAE were at a record high during 2023 and the pipeline remains solid for the near term. The construction sector accounted for the biggest pie of projects awarded in the UAE.”

Nishit Lakhotia, head of research at Sico Bank, said DSI's track record of executing large scale projects could enable the company to bid for mid to large scale projects in the UAE and other GCC countries.

"However, it is not going to be that straightforward," he said.

"It is equity negative and needs recapitalisation post debt write-off. In addition, banks who have take the hit from DSI’s exposure could be reluctant to lend to the contractor. So while the opportunity is there, turnaround of the company will also be challenging to that extent," he explained.

Mr Ansari said the company must expand revenue significantly and control operating expenses to turn around its bottom-line performance.

Drake & Scull had a total order backlog of Dh464 million in the UAE and overseas as of the first nine months of last year.

“The company is currently undergoing a restructuring and expects that it will help turnaround the business in the near term,” he said.

Drake & Scull’s profitability is contingent on a successful restructuring and the efficient execution of new profitable contracts, according to Hani Abuagla, senior market analyst at XTB Mena.

“Streamlining operations and securing a strong project pipeline are essential. The company's profits will also depend on the broader health of the construction industry, particularly in the Middle East which is experiencing strong growth but is also exposed to geopolitical risks.”

The company should also focus on maintaining cost discipline while “enhancing operational efficiency” to sustain profitability, he said.