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8| pfi | Middle East Report 2009 IPIC

months as demand for chemicals tailed off in the reces- sion-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 opera- tions in Europe, the Middle East and Asia. It was also rel- atively 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 regulato- ry 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 pur- chase 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 con- verted, 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 invest- ment firm acquire 96.4m new shares in Daimler at €20.27 each to become the company's largest share- holder; 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. How- ever, 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 down- stream oil investment vehicle. IPIC is now a key devel- opment tool in Abu Dhabi's global expansion.

How is it

going to pay for its

shopping spree?

You only have to look at the fact that Abu Dhabi's invest- ment in Barclays came through IPIC, rather than through the main sovereign fund, ADIA, to see its growing influ- ence within Abu Dhabi. Now, with Aabar under its wing, IPIC can continue to diversify into other areas without tak- ing 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 look- ing 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 propos- al, 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 trad- ing 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.

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