Abu Dhabi is flipping the script. In recent years, the United Arab Emirates’ leading light has blazed a trail by offloading minority stakes in subsidiaries of the Abu Dhabi National Oil Company (ADNOC).
Wednesday’s acquisition of KKR and BlackRock’s 40% stake in
ADNOC’s oil pipelines, by domestic investment fund Lunate, goes in the opposite
direction.
ADNOC’s original template made a lot of sense. National oil
company rival Saudi Aramco’s initial public offering of its whole business in
2019 created major disclosure requirements and intense wrangling over the final
group valuation.
ADNOC’s strategy of selling minority stakes in subsections
like oil and gas pipelines avoided all that, but still raised billions of
dollars of cash and burnished the UAE’s credentials as a destination for
foreign capital.
KKR and BlackRock’s 2019 original purchase of a 40% stake in
ADNOC’s oil pipelines exemplified the trend.
The buyers spent $4 billion acquiring part of the tariff
rights for 18 pipelines, amounting to 750 km, thus valuing the enterprise at
$10 billion. Aramco copied that model in 2021 and sold a 49% stake in its oil
pipelines subsidiary to investors including EIG Global Energy Partners for
$12.4 billion.
Five years on, it makes sense for KKR and BlackRock to exit.
They have sold their 40% stake for a similar price to the $4 billion they
bought it for, people familiar with the matter told Breakingviews. Given that
M&A involving secure infrastructure assets can be loaded up with debt,
dividends paid out over the last five years could be roughly the same as the
equity originally advanced. That means they may have doubled their money.
What’s less obvious is why Abu Dhabi is buying it back.
Arguably paying $4 billion for the assets is a slightly better deal in 2024
than in 2019, because the pipeline network has grown to 806 km. But it rubs
against the UAE’s long-term quest for foreign direct investment, which still
appears to be an objective judging by the relaxation of limits to overseas
ownership in recent years.
With neighbouring Saudi wanting to hike annual foreign
direct investment inflows to $100 billion by 2030, the risk is the UAE loses
its head start.
Lunate is an investment fund set up by Chimera Investment.
Chimera is owned by the Royal Group, which in turn is the majority owner of the
$239 billion International Holding Company, chaired by Sheikh Tahnoon bin Zayed
Al Nahyan, brother of the UAE’s president. Hence the sale could be part of a
wider expansion of entities associated with IHC. Or, given that Sheikh Tahnoon
is the UAE’s national security adviser, it could just be part of a wider global
pattern where states place a greater focus on owning domestic energy assets.
Either way, it makes for a departure from a well-understood
trend.
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