New Rising Stars Are Powering Gulf’s $50 Billion Spending Spree

Oil-rich Gulf monarchies are channeling more international deals via state-backed firms instead of the region’s sovereign wealth funds, as they seek to diversify their economies and win more global heft.

(Bloomberg) — Oil-rich Gulf monarchies are channeling more international deals via state-backed firms instead of the region’s sovereign wealth funds, as they seek to diversify their economies and win more global heft.

Alongside billions of dollars of sovereign investments, state-run companies in the United Arab Emirates and Saudi Arabia — many of which are also backed by the wealth funds — have been involved in at least $50 billion in deals this year across sectors from telecommunications to renewables and gaming. 

Although the global investment spree by sovereign funds is likely to continue, more of the strategic deals are expected to be done via the region’s largest corporates such as Abu Dhabi’s clean-energy producer Masdar, Emirates Telecommunications Group and Saudi Arabian Mining Co.

This week, Pure Health — majority owned by Abu Dhabi’s ADQ — bought one of the UK’s largest independent hospital operators in a $1.2 billion deal. AviLease, a jet lessor owned by Saudi Arabia’s Public Investment Fund, agreed to buy Standard Chartered Plc’s aviation finance business for $3.6 billion. 

The shift in dealmaking highlights how Gulf states are seeking to fulfill their outsized international ambitions, while creating top global companies amid limited expansion opportunities at home. Such efforts dovetail with wider plans to attract investment and technology, as well as build new industries and manufacturing capabilities. The strategy emulates the example of countries such as South Korea, where companies like Samsung Electronics Co Ltd. have become household names.

“Corporates in the Middle East, especially in Saudi Arabia and the UAE, are being empowered by their sovereign backers to go out and seek transformative transactions,” said Hamza Girach, co-head of Citigroup Inc.’s Middle East and Africa, banking, capital markets and advisory unit. “This is the biggest shift that we are seeing when it comes to dealmaking in the Middle East, which is the emergence of these companies who are seeking overseas growth and keen to expand via acquisitions.”

Over the past year, many of the world’s dealmakers have been turning to Gulf sovereign wealth funds — who collectively control at least $3 trillion of assets — to be a leading source of funding as others retreat. Dealmaking in the Middle East rose 39% last year, driven by the region’s sovereign funds and corporates, according to a report by Bain & Co. That compares with a 12% slump in global M&A activity. 

Wall Street bankers are now spending more time building relationships with some of the Gulf region’s top companies instead of focusing all of their efforts on wealth funds. Many of these firms have recently appointed new management teams with dealmaking, investor relations and financial experience to carry out acquisitions. 

To date, acquisitions by Middle Eastern sovereign funds have largely involved minority holdings. Deals by state-backed companies allow firms to acquire controlling stakes and gain more influence in the business via board seats and voting rights. Some firms such as Adnoc are also teaming up with international partners to get deals done. 

“Middle East investors are increasingly top-of-mind for international sell-side processes,” said Andy Cairns, managing director and head of Middle East and Africa of capital markets at Houlihan Lokey Inc. “At the same time, international parties are viewing Middle East suitors as attractive partners in more and more situations.”

In Abu Dhabi, which manages about $1.5 trillion of sovereign wealth and is home to funds such as the Abu Dhabi Investment Authority and Mubadala Investment Co., international expansion is being driven by the ambition of the ruling Al Nahyan family — and in particular Sheikh Tahnoon bin Zayed Al Nahyan. 

A bid considered by First Abu Dhabi Bank PJSC — which is chaired by Sheikh Tahnoon — to buy Britain’s Standard Chartered Plc earlier this year highlights the scale of the ambitions of the region’s corporations and the wealthy nations that back them. Entities linked to him also explored potential bids for boutique investment bank Lazard Ltd. and the UK arm of Silicon Valley Bank following its collapse, showcasing Abu Dhabi’s aspirations to play a bigger role on the international financial stage.

In April, Mubadala teamed up with Abu Dhabi artificial intelligence firm G42, controlled by Sheikh Tahnoon, to acquire Bridgepoint Group Plc’s European dialysis clinic chain Diaverum. An entity controlled by him was also part of a deal with billionaire banker Jaime Gilinski to takeover Colombia’s largest food-maker Grupo Nutresa.

Energy Giant

Many state-run companies are using vast pools of capital to get deals done. Adnoc is said to be preparing to boost its informal offer for German chemicals group Covestro AG to about €11.6 billion ($12.7 billion) from an earlier one of €11 billion, Bloomberg has reported. 

The Abu Dhabi energy giant is hunting for deals to better compete with Saudi Aramco’s Sabic chemical unit, and to develop the company’s own downstream and renewable energy operations. Adnoc is in separate talks with Austria’s OMV AG about a potential merger of two companies they back, Borouge Plc and Borealis AG, to form a chemicals and plastics firm worth more than $30 billion.  

Meanwhile, Abu Dhabi’s $60 billion telecom firm e& is pursuing an ambitious expansion strategy after becoming Vodafone Group Plc’s biggest shareholder. The firm’s been mandated by the government to seek opportunistic deals, and has hired former Morgan Stanley executive director Ilya Kiykov as head of M&A, Bloomberg has reported. It recently agreed to pay €2.15 billion for a controlling stake in some of PPF Telecom Group’s assets in Eastern Europe. 

State-owned firms in Saudi Arabia are also expanding. Saudi Telecom Co. in April made its first foray into Europe when it agreed to buy a portfolio of tower assets from United Group for €1.22 billion. The kingdom also made a push to deploy its vast wealth into the global mining industry in July, when the PIF and Maaden agreed to buy a stake in Vale SA’s base metals unit. 

The PIF has been bankrolling companies as the kingdom pushes deeper into sectors from sports to tourism through a series of high-profile acquisitions. The fund is using Savvy Gaming Group to spend billions buying esports tournament organizer ESL, casual game publisher Scopely Inc. and a stake in Nordic developer Embracer Group AB, making its mark in the video-game industry.

Walking Away

Other international expansion attempts have been less successful. Saudi National Bank, which is 37% owned by the kingdom’s sovereign wealth fund, had planned to use its investment in Credit Suisse to expand its wealth management and investment banking businesses inside the kingdom and globally, before comments by its chairman sparked a chain of events that eventually led to the collapse of the Swiss lender.

In Abu Dhabi, state-backed Emirates Steel Arkan in July walked away from a potential investment in Thyssenkrupp AG’s steel arm, despite pursuing ways to expand its business with various partners as part of what it called an “ambitious growth strategy.” 

Still, such experiences aren’t deterring the ambitions of the region’s biggest corporates. The UAE’s biggest renewable-energy company Masdar is on the prowl for power firms in places like the US and Europe and offshore wind projects in Asia as it seeks to more than double its operations this decade. And with Adnoc seeking to buy Brazil’s Braskem in partnership with Apollo Global Management for about $7.6 billion and a $2 billion deal with BP Plc for Israel’s Newmed, more mammoth deals are expected. 

“Dealmaking teams have become much more sophisticated, with impressive corporate pedigrees and a finger on the pulse in terms of being able to spot lucrative market opportunities across various sectors and geographies,” said Melissa Forbes-Miranda, a Dubai-based M&A lawyer and partner at Stephenson Harwood. “The influence of SWF-backed corporates in global dealmaking is likely to increase much further over the next decade and thereafter.”

–With assistance from Fareed Sahloul.

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