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Saturday, 21 October 2017

IPIC goes shopping

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The Abu Dhabi fund’s recent acquisition spree is helping it become a major global player, writes David French.

As the saying goes: "In the land of the blind, the one-eyed man is king." So in the current cash-strapped global economy that we have all found ourselves in during the last few months, anyone with spare cash has found themselves treated like royalty. This has meant that the ruler of Abu Dhabi, Sheikh Khalifa bin Zayed Al Nahyan, and the vast sums of petrodollars that his oil-rich emirate accumulated when oil prices were booming and breaking records, has been treated particularly well.

Everyone from banks to football teams have been courting Middle Eastern oil wealth to help repair tattered balance sheets and rescue them from the financial abyss; meaning the likes of Abu Dhabi and its GCC brethren have been able to pick up stakes in global corporates at very preferential rates.

Such preferential rates and depressed valuations have meant a number of prestigious corporate names now find themselves partly or fully controlled by the Al Nahyan family. But while Abu Dhabi is the name that every businessman and woman associates with this recent acquisitions spree, much of it can be attributed to one name under the Abu Dhabi umbrella: the International Petroleum Investment Company (IPIC).

Over the past few months, this 100% government-controlled fund has been the busiest architect of M&A activity in the Gulf. These purchases have not only allowed Abu Dhabi to extend its international reach but have established IPIC as a player with global ambitions.

IPIC has come a long way since it was established by decree in 1984 as a 50/50 joint venture between the Abu Dhabi Investment Authority (ADIA) and the Abu Dhabi National Oil Company (ADNOC). Brought under direct government control two years later, it has since moved towards developing Abu Dhabi's influence in the global hydrocarbons business by investing in different downstream projects both in the UAE and elsewhere in the world.

Its modus operandi is to invest in a minority stake, often between 25% and 40%, as a long-term strategic player. While much of its international investments have only occurred in the last couple of years, it has long been involved in important downstream projects at home. The biggest current scheme is the construction of the US$1bn Abu Dhabi Crude Oil Pipeline, which is due to begin operations in September 2010. However, it is also due to have a 40% stake in Chemicals Industrial City, along with the Abu Dhabi Investment Council (40%) and ADNOC (20%). The first stage of this project, the US$15bn–$20bn Naphtha unit, is currently looking for a financial adviser.

As well as the domestic projects it is involved in, the importance of IPIC to Abu Dhabi can be seen by looking at its board members. Its list of directors contains the majority of the upper echelons of the Abu Dhabi business community, including four members of the Supreme Petroleum Council. It is headed by the UAE Minister of Presidential Affairs, Sheikh Mansour Bin Zayed Al Nahyan, and also includes the CEO of ADNOC, Yousef Omair Bin Yousef, the Undersecretary of the Abu Dhabi Department of Finance, Hamad Al Hurr Al Suwaidi, and the UAE Minister of Energy, Mohamed bin Dha'en Al Hamili.

Despite its high status within Abu Dhabi and the wider UAE, it has only been in the last couple of years that IPIC has asserted itself on the world stage. Prior to 2008, it had slowly built up stakes in specific partners, including Austria's OMV and Borealis (the latter controlled in a 65/35 split with OMV) and South Korea's Hyundai Oilbank. It also agreed to acquire a 20% stake in Japan's Cosmo Oil in September 2007 for ¥89.8bn (US$776m).

However, it has been in the last 18 months that IPIC has undertaken a rapid expansion of its investment portfolio. As well as adding further hydrocarbon assets, it has begun to branch out into other areas, including chemicals and investments. Such moves are indicators of IPIC's increasing stature within Abu Dhabi and its growing role in shaping Abu Dhabi's global economic footprint.

The shift from being a pure downstream hydrocarbon investor to a much wider player began to take shape in early 2008. The first concrete sign of this change came on April 9, when IPIC announced that it had acquired a 2% stake in utility Energias de Portugal (EDP). In a statement announcing the deal, the company said: "The acquisition forms part of IPIC's current diversification plans and marks the entry of IPIC into the utility sector." The deal represented a small but significant shift into a new area; but one that was still close to IPIC's energy roots.

A much more seismic shift came in January 2009, when IPIC announced it had acquired a 70% stake in German industrial services group MAN Ferrostaal for €490m (US$670m). The cash deal for the arm of MAN Group, which also included a clause by which IPIC could purchase the remaining 30% by the end of 2010, stretched IPIC's reach into the industrial sector for the first time and gave it new markets and geographies to explore. Such moves have already begun to take shape, with MAN Ferrostaal being lined up by its new parent for a number of different roles. These includes the construction of a US$1.34bn ammonia and carbamide complex in Uzbekistan by a joint venture of IPIC and Uzkimyosanoat, the Uzbek state chemical firm.

But as IPIC was formalising its MAN Ferrostaal acquisition, it was also on the verge of announcing another; one that would give it direct access to North America for the first time.

On February 24 2009, IPIC confirmed that had reached agreement with Nova Chemicals for a takeover ultimately worth US$2.3bn. The decision would see the Abu Dhabi fund purchase all Nova's shares at US$6 per share – valuing the company at US$499m – as well as absorbing Nova's debts. IPIC would also offer a US$250m credit backstop facility to provide the Canadian company with liquidity to continue functioning.

The deal worked well for both sides. For Nova, the bid from IPIC amounted to a rescue from the punishing economic downturn. The day before the announcement, Nova's share price on the New York Stock Exchange stood at US$1.66, having fallen 96% in the previous 12 months as demand for chemicals tailed off in the recession-hit West and investors worried that it wouldn't be able to refinance US$250m of debts due in April 2009. Meanwhile, for IPIC, the acquisition gave it an established framework in North America to complement its operations in Europe, the Middle East and Asia. It was also relatively cheap, given that Nova's shares were trading just below US$30 in May 2008.

It wasn't long after that May date that IPIC began building its presence in another firm, which like IPIC, has made a name for itself and Abu Dhabi recently.

On July 3 2008, Aabar Investments posted a regulatory filing with the Abu Dhabi Securities Exchange in which it said that it had received a proposal from an "Abu Dhabi-based strategic investor" and that its board would meet the following week to discuss the move; which would entail issuing mandatory convertible bonds to the investor worth Dh6.7bn (US$1.82bn). Speculation over the mystery investor centred on Mubadala Development Company, given its stature within the Emirate and the fact that it had brought Aabar's Pearl Energy assets two months before for US$833.3m. However, it wasn't until September that it was announced that IPIC would be the new majority shareholder of Aabar.

Under the terms of the convertible, IPIC would purchase 2.28bn new ordinary shares in Aabar worth Dh3 each by November 30 2009. The bonds would pay a floating-rate coupon of three-month EIBOR plus 1.95% until the maturity date. Once the bond had been fully converted, IPIC would hold a 71% stake in the investment fund – with Aabar using the capital to fund its expansion plans. Ultimately, the bonds would be issued in two phases. The first tranche, worth Dh1.5bn, were issued on February 16 2009, with IPIC converting them into 500m shares three days later. Then, on March 23, IPIC converted the remaining Dh5.18bn.

The fact that IPIC had converted such a big chunk in one go, and well before the bonds' maturity date of November 30, was prompted by the fact that Aabar Investments had put itself on to the world stage 24 hours earlier by purchasing a 9.1% stake in German vehicle-maker Daimler. The €1.95bn deal saw the investment firm acquire 96.4m new shares in Daimler at €20.27 each to become the company's largest shareholder; usurping another GCC investment fund, the Kuwait Investment Authority.

Aabar's purchase of Daimler could look, on the surface, like just another Abu Dhabi investment fund using the Al Nahyan fortune to expand the Emirate's clout. However, the emergence of Aabar says more about IPIC and its future role. The use of IPIC to fund Aabar's capital expansion, through the sale of convertible bonds, shows that IPIC is now seen as more than just a straight downstream oil investment vehicle. IPIC is now a key development tool in Abu Dhabi's global expansion.

You only have to look at the fact that Abu Dhabi's investment in Barclays came through IPIC, rather than through the main sovereign fund, ADIA, to see its growing influence within Abu Dhabi. Now, with Aabar under its wing, IPIC can continue to diversify into other areas without taking all the risks itself and abandoning its downstream roots. IPIC's continued focus on the latter can be seen in the fact it has made a number of oil-related acquisitions at the same time as expanding into other sectors.

In November 2008, IPIC announced that it had agreed an A$1.68bn (US$1.07bn) deal for a 17.6% stake in Oil Search Ltd. The purchase of a five-year exchangeable bond from the Papua New Guinean government, through Independent Public Business Corporation, gave it access to all the nation's oil and gas fields and, indirectly, a small stake in the US$12bn PNG LNG Project, co-ordinated by ExxonMobil. The transaction was completed on March 5 2009 and once the bond is converted, IPIC will become Oil Search's largest shareholder.

The more significant example of IPIC's continued focus on downstream activities – as well as the impact the credit crunch is having in depressing valuations – was announced later that month.

IPIC first invested in Compania Espanola de Petroleos (Cepsa) in 1988 but had maintained a 9.5% stake for many years. Then, at the beginning of September 2008, reports in the Spanish press claimed that IPIC was looking to dramatically increase its stake with an offer for an additional 37.5%. This was split between the 32.5% stake held by Santander and the 5% belonging to Union Fenosa. Both had indicated their willingness to sell to interested parties, with Santander looking to divest its non-banking assets and sell Union Fenosa's stake as part of Gas Natural's €16.6bn takeover of the power company.

According to these reports, IPIC had offered around €45 a share, below the €69 where Cepsa's shares were trading on the Bolsa de Madrid. However, Santander was demanding €55 a share and while IPIC took time to think over the proposal, negotiations collapsed at the beginning of October.

However, IPIC returned to the negotiating table and, on March 31, confirmed that it had sealed a €3.3bn deal for the two stakes, taking its share in the company to 47% and becoming the second-largest shareholder behind France's Total. The fund ultimately paid €33 per share, much less than the €45 it was offering six months before, with Santander pocketing €2.87bn and Union Fenosa €529m from the deal.

Analysts were perplexed as to why the two firms had accepted the reduced offer, with some predicting an acquisitions spree from Santander and others fearing it was sitting on undisclosed toxic debts. However, even though IPIC paid market price (Cepsa's shares were trading around €33 at the end of March), it acquired a major stake in the Spanish concern for much less than it was willing to pay just a few months before.

This final acquisition seemed to highlight perfectly the situation that IPIC, and much of the GCC, currently finds itself in. With the economic slowdown squeezing the major corporations of the Western world, the likes of IPIC, backed by petrodollars, can use the situation as an opportunity to acquire stakes in these companies at knock-down prices. Such an opportunity may not exist again for years and IPIC has exploited the situation to its, and Abu Dhabi's, considerable benefit.

However, even though IPIC is able to pick up first-world assets without the old first-world price tags, there is still a question hanging over it that doesn't change; regardless of the economic situation. A question that also explains how IPIC has been able to move from being a steady downstream oil investor to an aggressive acquirer of global assets.

How is it going to pay for its shopping spree?

Prior to 2008, IPIC got most of its capital from the Abu Dhabi government. According to a Moody’s analysis of IPIC, published in May 2009, the authorities in the Emirate have injected US$3.5bn into the fund since its inception in 1984. Until 2008, the only other significant source of income for IPIC was from its investments.

But as IPIC became more aggressive in its acquisitions approach, the policy of relying on these two income streams had to change and IPIC began to look towards debt-based funding. In May 2008, it took only its second foray into the loan markets when it closed a €975m one-year loan through Bank of Tokyo-Mitsubishi UFJ (BTMU), BayernLB, HSBC, National Bank of Abu Dhabi (NBAD) and WestLB. It followed this up soon after, in July 2008, with a ¥67.5bn term loan from BTMU and NBAD to fund the purchase of its 20% stake in Cosmo Oil.

However, it has been since the beginning of 2009 that IPIC's use of the debt markets has mushroomed. According to Moody’s, IPIC's debt liabilities are due to double to about US$9.5bn from their level at the beginning of the year. This is based on current commitments and announced acquisitions.

It has already closed one loan deal in 2009: a US$700m three-year facility, co-ordinated by Deutsche Bank. This loan, which was initially launched in January and aimed to raise US$1bn, was to be used to fund the purchase of its Oil Search stake. Deutsche Bank originally wanted to market the loan at banks in the Asia-Pacific region (minus Japanese banks) but also included Citigroup in its initial talks. However, the extremely tight credit markets in the region meant that there was no liquidity available and so it looked elsewhere to secure the funds. Ultimately, it attracted four banks: Abu Dhabi Commercial Bank, Calyon, First Gulf Bank and Natixis, which were paid a margin of 300bp.

However, even as this facility was closing, there were rumblings in the market that indicated something else was going on. The first indications came as early as February, when IPIC began moves to refinance its €975m one-year club, due to mature in May. However, by the time it closed its Oil Search facility at the beginning of March, it was clear that something much bigger was happening; combining both the May refinancing and funding for acquisitions into a multi-billion dollar syndicated loan.

Negotiations took place between the three co-ordinators: BTMU, HSBC and Santander, throughout March and April, with chatter growing in the market about what was building. Talks also took place with a number of other banks, mostly international but also a couple of locals, about putting together a top group to fund the facility, with talk of commitments in the region of US$500m. In mid-April, a figure appeared in the press that proved to be true: IPIC was looking for US$5bn.

The deal was due to be officially unveiled to the market in the middle of May. As well as refinancing the one-year loan, it is expected to repay US$1.8bn of bridge loans used to buy the Aabar convertible and provide funding towards the Nova Chemicals and Cepsa acquisitions. It is expected to be syndicated, with a financial close predicted for towards the end of June.

What will help IPIC's fundraising cause is the credit ratings that it received from Fitch Ratings (AA), Moody's (Aa2) and Standard & Poor's (AA) at the end of April. Not only will it help secure banks on its loan deal but it will also allow it to tap another funding stream: the bond market. While IPIC has admitted that getting a credit rating will help it tap the bond market in future, it insists it has no current plans to do so. However, even before the credit rating was revealed, reports that IPIC was lining up a bond issue for when the loan had cleared the bank market had begun to surface. Further fundraising would need to be on the cards, according to Moody's, as IPIC needs US$6.1bn of finance over the coming months.

Such a switch towards relying on the loan and bond markets shows the shift that IPIC has made to allow it to grow at such an ambitious rate. While the Abu Dhabi government will continue to provide capital to IPIC, it has now made the break from solely relying on the authorities for its finance. However, because of the growth that Abu Dhabi has already achieved, and the continued growth that IPIC is now an integral part of, access to such funding shouldn't be a problem. The fact that it is putting together a US$5bn loan at a time when credit markets are still suffering shows not only the scale of its ambition but the level of respect that both IPIC and Abu Dhabi now command on the world stage.

Therefore, at a time when distressed valuations provide a unique opportunity for those with the capital at their disposal, IPIC is grasping it with both hands and is becoming a major force in both Abu Dhabi and the wider world.

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