Abu Dhabi orders merger of state funds Mubadala and IPIC

Abu Dhabi will merge two of its most important investment funds, Mubadala Development Co. and International Petroleum Investment Co. (IPIC), responding to the impact of lower oil prices by pooling their investment power and consolidating operations.

With oil prices still below half the levels they were at two years ago, all Gulf sovereign funds are having to adjust their strategies to cope with lower inflows. Mubadala did not receive any new cash from the government in 2015 for the first time in at least eight years.

The combined fund would have assets worth around $135bn, according to Reuters calculations based on both funds’ latest financial statements.

On Wednesday, in a statement published by the state news agency, Abu Dhabi said it had formed a committee led by Deputy Prime Minister Sheikh Mansour bin Zayed al-Nahayan to oversee the combination of Mubadala and IPIC.

“The merger of the two companies augments the investment advantages and economic revenue for Abu Dhabi, and creates a body capable of achieving the highest level of integration and growth in multiple sectors, including energy, technology and space industry,” the agency said.

The tie-up, which was being approached as a merger of equals, should be completed by the end of 2017, a source close to the discussions told Reuters on condition of anonymity due to the sensitive nature of the subject.

While not adopting the radical approach of neighbouring Saudi Arabia, which aims to completely revamp its economy through a national transformation plan, Abu Dhabi has been slowly reforming key parts of its economic infrastructure to cope with reduced oil revenues.

Abu Dhabi National Oil Company is just one of the state-owned entities to have shed thousands of jobs in recent months, while two of its largest lenders, National Bank of Abu Dhabi and First Gulf Bank, confirmed earlier this month they were in merger talks.

BENEFITS

“It’s a sensible move at a time when there’s a need for Abu Dhabi to slim the budget and consolidate organisations that are doing similar things,” said one analyst who covers sovereign wealth funds, who declined to be named due to company policy.

Mubadala’s role had been to make investments to help advance Abu Dhabi’s economy, both domestically through ownership of firms such as satellite operator Yahsat and aerospace components manufacturer Strata, but also through stakes in global names including General Electric and Carlyle Group.

It also has a petrochemicals division and a number of investments in energy projects, including ownership of clean energy firm Masdar, which would fold neatly into IPIC’s traditional energy sector remit.

IPIC owns Spanish energy firm Cepsa, Canadian petrochemical maker NOVA Chemicals and has a majority stake in Austrian plastics company Borealis.

The improved ability to raise money from international markets was also a rationale behind the tie-up, according to the source close to the discussions.

IPIC’s debt levels have been regarded as an issue for some time, with rating agency Standard & Poor’s saying in a June 28 note that while its business risk was satisfactory, its financial position was “highly leveraged”.

IPIC is also in the midst of a row with 1MDB. The Abu Dhabi fund has asked a London court to arbitrate in a dispute with the Malaysian state fund over a debt restructuring in which IPIC is claiming about $6.5bn.

While unlikely to impact these proceedings, the sovereign wealth fund analyst said the scandal had undermined IPIC’s reputation and so a tie-up with Mubadala, which is considered one of the better-run state investment funds in the region, would be beneficial.