A merger for the ages in Abu Dhabi
In its bid to reduce dependence on oil and gas revenues, Abu Dhabi has decided to integrate two of its largest investment firms, IPIC and Mubadala, into a single entity that will have a portfolio of around $125bn.
In times like these, ‘optimisation’ appears to be the only reasonable economic policy, business approach or corporate strategy that will help the Middle East’s oil and gas-dependent governments and companies navigate the financial doldrums in which the currently finds themselves mired. The leadership in Abu Dhabi seems to have done just that by recently deciding to pool the resources of two of its biggest investment corporations to create a single entity with such a huge and varied portfolio, so plump with ready-to-invest funds, that it can assist the emirate’s economy in becoming investment-driven.
His Highness Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi, Deputy Supreme Commander of the UAE Armed Forces and Chairman of the Abu Dhabi Executive Council, on June 29, ordered the merger of Mubadala Development Company and the International Petroleum Investment Company (IPIC), streamlining the country’s investment strategy as it weathers a slump in oil prices that has dented the state’s exchequer. The resolution will combine the two Abu Dhabi government-owned investment funds into a new body that will hold roughly $125bn in assets across businesses ranging from computer chips to renewable energy.
The decree from Sheikh Mohammed bin Zayed al-Nahyan emphasised the potential synergies realisable by the tie-up, in industries including, – most obviously – energy, where IPIC’s activities are concentrated. Mubadala’s mandate is more general – to invest at home and abroad across sectors the development of which is adjudged to advance Abu Dhabi’s wider economic aims.
“The combined entity will realise synergies and growth in multiple sectors including the energy and utilities sector, technology, aerospace, industry, healthcare, real estate and financial investments,” says the decree, details of which were made public by state news agency WAM. The decree continues: “It will also have the ability to contribute more significantly to the diversification of the economy, in line with the Abu Dhabi Plan and the country’s long-term vision.”
The move has been welcomed by all as wise and timely – one that would help the Abu Dhabi-led UAE build the foundation for a stable financial future and significantly reduce its reliance on fossil fuel revenues. “The merger has the potential to be very positive. Hopefully, the merged entity will be more efficient and have greater firepower for investments. The success or otherwise of the venture, however, will need to be judged over a number of years,” says Richard Devine, a partner who heads the Oil and Gas practice at Clyde & Co.
“This merger is a consolidation of the sovereign wealth sector in the UAE and is consistent with moves seen elsewhere in the GCC region. The sector will benefit from expected cost cuts, driven by streamlined operations,” Muhammad Fadhil, regional manager at ICIS MENA, tells Oil & Gas Middle East. “During the consolidation process, the government will expect to benefit from economies of scale. The new entity will see value in complementing each other and addressing gaps in market expertise.”
Sirine Tajer, managing director of MENA Energy Partners, says: “There seem to be two main rationales for the merger. First, the merger allows [Abu Dhabi] to leverage on Mubadala’s robust management to handle the assets of IPIC, which presently has a thin senior management – this is a human resource leverage effect. Secondly, the merger allows [Abu Dhabi] to obtain an entity which is vertically integrated, benefitting from both upstream (Mubadala) and downstream (IPIC) assets.”
She also cites another potential benefit of the merger, quoting state media, which said: “It would also build on the creation of quality, long-term employment and development of human capital in critical sectors for the emirate.”
According to the decree, a joint committee will be established to oversee the merger, chaired by Deputy Prime Minister Sheikh Mansour bin Zayed Al Nahyan – who also chairs both companies – with Mubadala chief executive officer and managing director Khaldoon al-Mubarak as his vice-chairman, and also including the UAE’s Energy Minister and IPIC managing director Suhail Mohamed Al Mazrouei. The two vehicles will continue to act independently until the process of integration is completed, for which no timeline has been set. “It’s difficult to predict a timetable but frankly that is not what excites me about this initiative. I am sure a streamlined strategic investment approach is already in place. That will be key and represent the positive upside of this initiative,” Jon Nash, a partner at law firm Dentons Abu Dhabi office, told this magazine.
Bigger and better
The most recent financial statements show that Mubadala holds around $67bn in assets and IPIC approximately $58bn, with the two Abu Dhabi companies burdened with around $42bn in combined debt – the bulk of over $30bn borne by IPIC. The energy-focussed IPIC is also by far the more troubled. As per results released on June 30, IPIC slumped to a $2.6bn loss last year as a consequence of write-downs of $8.1bn – chiefly caused by the global oil market downturn.
IPIC, the older of the two vehicles, created in 1984, is also facing the particular problems induced by exposure to the scandal-hit Malaysian government development fund 1MBD, which IPIC announced in June it would take to international arbitration in order to recover $6.5bn in alleged unpaid obligations.
In a statement accompanying the results, managing director Al Mazrouei nevertheless professed confidence in the strength of the firm’s business. “IPIC remains in a strong position due to an investment portfolio that is diversified throughout the hydrocarbon value chain, as well as prudent financial management,” he asserted. “We believe IPIC is well-positioned as a strong complement to Mubadala, as global energy demand gradually resumes its upward trend.”
On the other hand, Mubadala’s 2015 profit increased by 12% to $317mn on the back of higher income from a variety of non-oil sectors, including semiconductors, real estate, healthcare and financial investments. Mubadala already has a dedicated energy ‘platform’ comprising Mubadala Petroleum and clean energy unit Masdar. The former’s interests are currently concentrated in upstream exploration and production (E&P), mainly in Southeast Asia, but includes a stake in Oman’s largest enhanced oil recovery (EOR) project at the Mukhaizna field.
Mubadala also has stakes in Dolphin Energy, operator of the Qatar-UAE-Oman gas pipeline – and, alongside IPIC, in the Emirates LNG vehicle for a long-planned LNG import terminal at Fujairah. It’s non-oil and gas holdings include semiconductor maker Globalfoundries and renewable energy company Masdar, as well as stakes in Fairfield, General Electric Co and Washington-based private equity firm The Carlyle Group.
IPIC holds stakes in several energy-related companies and owns most of Abu Dhabi-based Aabar Investments, the holdings of which include partial ownership of space tourism startup Virgin Gallactic. Morever, the company’s energy sector interests are more globally-diverse and more downstream-focussed, including majority ownership of Austria’s Borealis – state-owned Abu Dhabi National Oil Company’s (ADNOC) joint venture partner in Abu Dhabi Polymers Co (Borough), which owns and operates the emirate’s main petrochemicals complex at Ruwais.
The market is already abuzz with how the yet-to-hatch enterprise will grow, and analysts seem to be casting their lots on the sort of investments it will make.
“The new company is likely to continue to invest both in the upstream and the downstream sector. A single united company will profit from the economies of scale,” Ehsan Ul-Haq, a senior analyst at London-based KBC Energy Economics, believes.
Tajer agrees, saying, “New energy investments will be long-term (and not short-term), guided and balanced between upstream and downstream, as profitability of each segment depends on the cycle we are in,” she says. “In addition, given the importance of the reduction of dependence on the hydrocarbons sector and economic diversification for the UAE – like all other GCC countries – I do expect further investments in renewable energy and other sectors which have been cited by the Crown Prince’s Court [such as technology, aerospace, industry, health care, real estate and financial investments].”
Dentons’ Nash also chooses to believe that the merged body will be inclined to invest more in non-energy assets. “Both groups have considerable assets outside of energy [in real estate, aerospace and technology]. While I am sure the new entity will be looking at acquiring good distressed assets in the oil and gas space, there is a natural tendency in the current economic climate to look at utility assets and their steady revenue streams as well,” he says.
Yet there seem to be other experts, such as Devine of Clyde & Co, who are not entirely sure about which direction Abu Dhabi’s wealth portfolio will take, and prefer to wait and watch. “It is not clear what investment strategy the new company will employ. Mubadala has a range of investments outside of the energy sector and it’s not clear that oil and gas or other aspects of the energy chain will be a focus,” Devine says. “SWFs (sovereign wealth funds) don’t necessarily have the same investment constraints as publicly listed companies, so the new company might be able to take a longer-term view of investments. This means it may be able to invest in sectors that are unfashionable and better value presently, on the basis that they will recover in due course.”
Taking a cue from Saudi?
The Kingdom of Saudi Arabia – by far the most affected by the free-fall of crude oil prices – adopted a similar approach earlier this year when, in April, dynamic Deputy Crown Prince Mohammed Bin Salman declared that Riyadh plans to sell around 5% of its biggest asset, Saudi Aramco, through an IPO, and eventually transfer the shares to the kingdom’s SWF, the Public Investment Fund.
“IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil,” the prince said in an interview to Bloomberg. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”
The unprecedented plan to sell part of its national oil company – albeit just the downstream assets – to create a gigantic SWF worth trillions of dollars, and laying out a comprehensive policy, as envisaged in the Saudi Vision 2030, to further lead the country away from its addiction to oil revenues, is being considered by many as not just Saudi Arabia’s effort to adjust to the new realities of a low oil price era, but also as a blueprint for other GCC states to adhere to in order to secure their future.
So is the UAE, by choosing to create a massive and diverse investment portfolio, following Saudi’s lead? Not according to the experts.
“I don’t think that’s necessarily the case. The low oil price environment is making the UAE – and KSA – think about costs carefully. Lower oil revenues are driving efficiencies in both the public and private sector. Abu Dhabi may simply have thought that having two entities with the same ultimate ownership operating – and potentially competing – in similar spaces was unnecessary,” Devine believes.
Nash offers a similar view, “I don’t think the UAE follows anyone’s lead. Abu Dhabi’s growth has been phenomenal in recent years. Inevitably, it has had to look to reorganise its assets to ensure as streamlined delivery of return as possible. Abu Dhabi has actually been going through a period of considered restructuring and consolidation for a few years now. This is another [significant step on that road].”
Tajer, in unison, further explains: “I do think that the UAE or Abu Dhabi has been in advance vis-à-vis Saudi Arabia in the creation and management of its SWF. The ADIA (Abu Dhabi Investment Authority) was created in 1976 and IPIC in 1984. Furthermore, without counting TAQA and the new international investment arm of ADNOC, taken together, the SWFs of UAE – ADIA ($777bn), ADIC ($110bn), Mubadala ($68bn) and IPIC ($58bn) – are second only to China’s.”
Industry observers feel it might be premature to say that the UAE has implemented the Saudi diversification formula and support their argument by saying that they do not expect any shares sale of ADNOC in the foreseeable future. Whether or not Abu Dhabi is following Saudi’s lead could be debated for a long time. But there’s no denying the fact that in a bid to remain competitive in a testing economic climate, governments are aggressively pressing ahead with consolidating their assets and operations – something that has led to a spike in mergers and acquisition (M&A) activity in the region.
“I think, lower oil prices have forced governments in the Middle East to look thoroughly at their investments. It is also resulting in more M&A activity,” Ul-Haq says. “However, the UAE’s sovereign funds could weather the storm much more easily than the other funds, as the UAE economy is not as much dependent on oil prices as other governments in the Middle East are. IPIC and Mubadala have much more experience in diversifying their investments than other sovereign funds.”