Merger of Abu Dhabi funds streamlines sovereign investment sector

August 28, 2016
Wealthi­est emirate within UAE

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.