Merger of Abu Dhabi funds streamlines sovereign investment sector
Washington - Abu Dhabi’s plan to streamline its foreign and local investment decision-making process by merging sovereign investment funds Mubadala Development Company and International Petroleum Investment Company (IPIC) is a step in the emirate’s drive to become more fiscally responsible and efficient in an era of low energy prices and tumbling state income.
Even though it is the wealthiest emirate within the United Arab Emirates, Abu Dhabi has been hit hard over the past two years by low oil prices. The government is projected to have a $10.1 billion budget deficit for 2016, which is expected to be covered primarily through international bond issues.
In the summer of 2015, Abu Dhabi became the first government in the region to reduce costly energy subsidies to curb spending due to an extended oil price slump.
Abu Dhabi has taken other steps to trim costs and eliminate redundancies. The merger of the two state investment funds preceded word that the National Bank of Abu Dhabi and First Gulf Bank, both majority-owned by the Abu Dhabi government, had won board approval for their own merger that will produce a banking giant with $175 billion in assets. In May, state oil firm Abu Dhabi National Oil Company (ADNOC) began the process of laying off as many as 5,000 of its 55,000 employees by the end of 2016.
The merger of Mubadala Development and IPIC, to be completed next year, will create a state investment fund with as much as $135 billion in assets. The merger process is to be overseen by a committee led by IPIC Chairman and UAE Deputy Prime Minister Sheikh Mansour bin Zayed al-Nahyan with Mubadala Chief Executive Officer Khaldoon al-Mubarak serving as vice-chairman and UAE Oil Minister Suhail Mohamed Faraj al-Mazrouei participating on the committee.
“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,” IPIC said in a statement.
It is unclear if the entity that will evolve from the merger will be a new holding company or an enhanced version of either Mubadala Development or IPIC.
The merger has already received a tacit endorsement from credit ratings agency Standard & Poor’s (S&P), which announced it had “affirmed its ‘AA’ long-term and ‘A-1+’ short-term issue credit ratings” for Mubadala Development, noting “the almost certain likelihood” that the Abu Dhabi government “would provide timely and sufficient extraordinary support to Mubadala in the event of financial distress”.
S&P expressed similar assurances for its ratings for IPIC but cautioned that “Mubadala and IPIC have outstanding commercial debt that will need to be taken into consideration in the merger process”. While the agency indicated that IPIC’s business risk was satisfactory, it warned that the sovereign investment fund’s financial position was “highly leveraged”.
IPIC, which was formed in 1984, and Mubadala Development, established in 2002, were both mandated with generating investment income for the government of Abu Dhabi. They have increasingly been pushed to help diversify the emirate’s economy away from oil. For example, Mubadala Development owns domestic satellite communications operator Yahsat and local aerospace components firm Strata Manufacturing.
The two state funds are similar in asset size but their portfolios differ greatly. IPIC has a larger energy sector focus with an eye to more downstream operations. IPIC has fully invested in several international energy-related companies, including 100% stakes in the Spanish integrated oil firm Cepsa and Canadian petrochemicals company Nova Chemical Corporation. It also holds minority stakes in Japanese refining company Cosmo Oil, Austrian integrated oil firm OMV and the Arab Petroleum Pipeline Company (SUMED) in Egypt.
Mubadala Development’s energy investments account for about 10% of the fund’s assets and include upstream oil and gas stakes in Asia and Oman as well as a 51% interest in Dolphin Energy, which is responsible for producing natural gas in Qatar and piping it to the UAE, and 100% ownership of Abu Dhabi’s renewable energy firm Masdar. Mubadala Development cuts a wider swathe than IPIC in investments in other sectors with substantial stakes in the health care, technology, utilities and aerospace industries.
Consolidation of the two sovereign investment funds follows the advice that bankers have long given the Abu Dhabi government to eliminate overlaps in functions carried out by similar state entities to produce cost-savings and higher efficiency. Yet to be determined is how many jobs will be shed in the merger — the two firms collectively employee 60,000 people — as well as the composition of the new fund’s board.