Times of hardship are times for consolidation, and Abu Dhabi has just announced what's probably the biggest M&A deal this year in oil. The emirate will merge its International Petroleum Investment Co (IPIC) and Mubadala Development Co., its two largest sovereign funds.
The decision, which will result in an entity holding some $135 billion in assets, comes in response to the persistently low oil prices, which have left the two funds - as well as their peers in the Gulf - with much lower than usual inflows as governments struggle with lower oil revenues.
Abu Dhabi's government is no exception. The drop in oil revenues has prompted urgent steps to keep the economy going. Abu Dhabi will cut public spending by 17 percent this year, according to Bloomberg, which cited a bond prospectus issued by the emirate, along with calculations of the IMF that sees GDP growth this year to drop to 1.5 percent, from 4.3 percent last year.
Mubadala is a diversified fund, with interests in a range of industries from energy to telecom, to aerospace-both at home and abroad. IPIC, on the other hand, focuses exclusively on oil and gas, and their related industries such as petrochemicals and plastics. The tie-up, according to analysts, makes perfect sense in the context of the cost-cutting drive and will help to stabilize revenue streams. Related: Oil Outages Come Back Online, Cause Large Downside Risk
One analyst, talking to Gulf News, said that the deal is unlikely to change the investment strategy of either of the funds: the main goal of Mubadala is to invest in sectors different from energy in order to provide alternative revenue sources for Abu Dhabi, while IPIC is firmly an energy investment business. The reason there will be no change in strategy, says Anita Yadav, is that the people who decide on the investments these funds are making, are ultimately the same. Still, the deal is seen as beneficial for the Abu Dhabi economy.
Some see the deal as a signal of more consolidation in the emirate. It's a fact that the announcement of the deal comes just a couple of weeks after Abu Dhabi's two largest banks, National Bank of Abu Dhabi and First Gulf Bank, announced their pending tie-up. It would be only logical to expect that more M&A deals will follow, as the emirate seeks to organize its economy around a few mighty entities that will ensure its sustained growth. Though analysts seem to agree on the fact that more M&A deals are in the making, they did not specify in which sectors these will take place.
Still, consolidation was not the first choice of the Abu Dhabi government. Initially, asset sales were proposed for both of them. These, however, did not work out as planned, which is hardly surprising in the current energy market environment. A merger certainly makes more sense for IPIC and Mubadala - overlapping operations will be streamlined and unique operations will benefit both.
A smart move for Abu Dhabi and a new international energy giant with assets almost equal to those of Rosneft and exceeding those of ConocoPhillips and daily oil production of almost half a million barrels.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More