Over 2 years ago, the International Petroleum Investment Company (IPIC) acquired 70% of MAN Ferrostaal AG (later renamed Ferrostaal) from the MAN SE, the German industrial group. MAN retained a 30% stake.  As soon as IPIC agreed to buy, MAN was caught up in a large scandal involving bribes for contracts. While initially the investigation only involved executives in MAN. Ferrostaal was soon caught up in the scandal. A year after the IPIC purchase, two Ferrostaal executives were arrested as part of the investigation.. Since then, Ferrostaal has been fined $378 million by German authorities. MAN has also been slapped by additional fines, which they are still disputing along with the Ferrostaal fine.

While I don’t believe IPIC were, at any point, shocked that Ferrostaal executives were part of a wider bribery investigation, I’m sure they were shocked when it came to the heavy fines. At the time, $378 million was half of estimated value of Ferrostaal.

At part of the original investment, IPIC had the option — which was expected — to be picked up the remaining 30% being held by MAN. IPIC balked. IPIC figured that if they acquired full control of the company, it would be expected to pay the fines. IPIC attempted to received promises from MAN that they would pay any fines that came as a result of the investigation. The last few months have seen a back and forth between the two companies over the dispute. Late in September, word came that IPIC had hired to Morgan Stanley to review their Ferrostaal investment, which could pave the way for IPIC to take their case to court. It now appears that Morgan Stanley, rather than investigating, was trying to work with MAN to find a unique way of getting rid of Ferrostaal.

The details of this unique way came out today. MAN will pay IPIC €350 million ($467 million) for IPIC’s entire holdings in Ferrostaal (Press release). MAN has then, in turn, sold off the entire company to MPC Group for €160 million. MPC is now responsible for paying any fines, and dealing with the now rather chaotic Ferrostaal.  With the deal, IPIC has taken a lost of about $150 million. This prevents the case from ending up in the German courts and means that IPIC has left the German plant building business.

If there’s one sentence that captures Angola’s increasing influence in Portugal and their ever growing pot of assets in their former colonial power, it’s this one from APF:

Angolan companies now own the equivalent of 3.8% of companies listed on Portugal's stock exchange, from banks to telecoms and energy, the [Portuguese Institute of International Relations and Security] said.

The article where that sentence is found is a good background piece on the eve of the Portuguese PM visit to Angola. Another quote:

... Angolan investments in Portugal, both state and private, rose from €1.6m in 2002 to €116m in 2009.

In August, Temasek Holdings and the Oppenheimer family announced that their were creating a joint venture that would look for private equity investments in Africa. The fund was named Tana Africa Capital and would focus on consumer and agricultural investments.

To be frank, I paid little attention to the announcement.  $300 million, spilt between two partners, isn’t that much. It seemed to me that the sole reason the fund that was created was a way for the two to set a foundation for future more lucrative investments. Sure, the fund would make a few investments here and there but it would be limited and not an important part of Temasek or the Oppenheimer’s investment strategies.

That has changed today. Anglo America has brought Oppenheimer’s 40% stake in De Beers, the mining giant. Oppenheimer will net $5.1 billion from the sale. The family has announced that they will “invest the bulk of the proceeds” in the newly created JV.

While there’s no exact amount yet, this increase capitalization might just make this fund end up being the largest PE fund investing in Africa. The family has said the bulk of the proceeds from the sale will go into the fund. Considering they just made $5.1 billion, a bulk could mean anywhere from $2.5 billion to $5 billion, which is a far cry from the puny $300 million that the venture was originally capitalized with.

I’m unsure if an increase investment will lead to a greater ownership stake in the fund by the Oppenheimer. This could lead to Temasek ponying up more money to keep their ownership stake equal. Even if the ownership levels remain the same, Temasek will probably end up providing additional technical knowledge when it comes to PE deals. Oppenheimer provides the cash, Temasek uses their expertise and make the deal.

I think it’s quite reasonable to say that Temasek is the SWF with the most emerging market experience. But for Temasek, emerging markets has always meant close to home with India, China, and Indonesia making up the bulk of their investments. Compared to Asia, and most recently in Latin America, Africa has seen little attention from Temasek. In their latest annual report, Temasek reported that its investments in Latin America, Africa, Central Asia & the Middle East made up 3% of its portfolio. I’m guesstimating that Africa probably makes up less than .5%. Only investment I know is another private equity fund.

I’m excited about the possibilities of the fund. It will certainly be interesting to see their deals, which. as the Bloomberg article noted, should start happening with the next 8 weeks.  

The chairman of RHB Capital has reignited speculation of RHB merging either between Maybank or CIMB. It was widely speculated that merger talks were going very well until Abu Dhabi Commericial Bank, owner of a quarter of the bank, sold their stake to Aabar for much more than it was worth (my thoughts on the deal). This overvaluation caused the two suitors to back away quite quickly. With Azlan Zainol, the chairman of RHB Capital, apparent support of a deal, it seems seems that everyone in Malaysia’s financial sector, including the government, would like this deal to happen.

Maybank or CIMB might want to check with Abu Dhabi Commercial Bank, the bank might be happy to provide financing for the deal. Aabar will just have to overpay another one of ADCB’s assets.

Sonangol, Angola's national oil company, is continuing to expand  their scope outside of the oil sector. Macauhub reports on their latest plan. 

Angolan state oil company Sonangol plans to set up 7 new industrial units in the Special Economic Zone (ZEE) and is seeking partnerships with private companies to carry them out, a group official said.
Bravo da Rosa, chairman of the Executive Commission of Sociedade de Investimentos Industriais (Siind), the arm of Sonangol responsible for coordinating and managing industry, said that the 73 new industrial units covered activities as diverse as metal mechanics, galvanisation, manufacturing prefabricated houses, recycling, glass production and even poultry production.

This isn't necessarily a bad thing. Sonangol is reasonably efficient, especially compared to the government and other SOEs. It has also has more trust from foreign companies than the Angolan government.  Foreign oil companies have given Sonangol even some acclaim for their operations in doling out contracts. With Sonangol running these various projects, there should be far more investors interested in partnerships. This should encourage foreign investors to take on the challenge of investing and operating in Angola when they know that Sonangol is the lead agency.  
But this should not be the long term solution. This is outside of Sonangol's purview and they have limited experience setting up factories and running anything related to some of the activities listed above (poultry production?). No other Angolan government agency does either so Sonangol's involvement is acceptable for now.   As much as Sonangol learned from observing  how oil companies operated in other countries, Siind should do the same by observing some of the better aspects of Sonangol. Once they gained this experience, Siind needs to branch out on their own. 

If everything goes as planned, this will be one of three posts on the International Petroleum Investment Company and Aabar Investments.

I have been silent on Aabar’s investment in Malaysian bank RHB Capital, because well, it’s not spaceships. However, there’s been some recent developments that have made me rethink my silence.

An overview of the investment: Aabar agreed to purchase a 25% stake from the Abu Dhabi Commercial Bank in June of this year. The stake was sold for $1.9 billion. The sale was completed last week. 

The thing is Aabar massively overpaid for their stake in RHB. Several Malaysian banks, Maybank and CIMB Group specifically, had plans to takeover the bank. When Aabar overpaid, they backed off. This overpaying appears to have annoyed the Malaysian government as they would love to have “home-grown takeover of RHB.” However, this overpaying certainly helped ADCB as the firm has has not had the best year. ADCB returned to profitablity in 2nd quarter.  While the sale did not help cause ADCB 1st profitable quarter in 16 months. This being said, it will certainly will help ADCB's 3rd quarter, which coincidentally ended the same date as the RHB sale was completed.

It gets slightly better. Even before completing the purchase, Aabar started considering writing down their stake  by 25% because they might have slightly overpaid. Aabar didn't even attempt to renegotiate the sale or even drop out. 

Now it gets even better. IPIC, the parent of Aabar, has taken out a loan to pay for the $1.9 billion purchase. Who’s providing this loan? An Abu Dhabi bank that goes by the name of Abu Dhabi Commercial Bank. Yes, this is the same one that’s just sold their stake to Aabar for $1.9 billion. Remarkable.

ADCB has a high status within Abu Dhabi and outside, not because it’s a well run bank – it’s not – but because it’s a listed bank that has been aggressive and has the reputation of being separate from the government. If ADCB has to turn to the government for capital would be a worrying sign for all companies within the UAE. Any other attempts at state-intervention would cause ADCB to spike down and will probably see other semi-private firms in the country also take a hit.

The same isn’t true of Aabar and IPIC. Since the government fully owns the firms, there are no other shareholders. If Aabar decides to take a hit and write down their stake, there’s really no major consequences for the firm, as apparently it can borrow money at will.  That’s not the case for ADCB, which has 35% of it listed on the Abu Dhabi exchange. IPIC will certainly continue paying their ADCB loan. The government might throw some money their way in the future to make this up.

How is it anything but Abu Dhabi doing a very complicated capital infusion into ADCB?

It’s clear that Qatar will end up with a large stake in EADS, maker of Airbus and military aircrafts, at some point in the near future, possibly within the next month. Not only is it Germany’s only option, it’s also Germany’s best option.

It’s probably best to start out a little about EADS ownership, which is quite complex. See chart below from EADS. Essentially France and German have ensured that either their government or a safe secured company of their nationality control their potion of EADS’ stake.
Daimler directly owns 15% of EADS and has loaned out an additional ~7.5% to German financial investors (like I said, complex). Daimler would like to disinvest itself of 7.5% now and their remaining holdings in the near future. Daimler has considered their stake to be non-core and they have taken a financial hit with their EADS stake. They announced their disinvestment plans  last February.

In addition, Lagardère is expected to sell a 7.5 stake after the French presidential election next Spring. I’m not sure if this sale is dependent on which party wins the election or its just to avoid the political issue dominating the election.

Getting back to Daimler, Germany’s government has been trying to find somebody, anybody within Germany to take the stake which is worth about $2.5 billion. They haven’t. This FT’s piece has a good overview.

The government has discussed using their state development bank, KfW,  to takeover the holdings but there’s huge disagreement within the coalition government over that option. While Merkal appears to support the idea, some of her coalition partners are less than thrilled with increased state involvement. It also doesn’t quite make sense for KfW to use their capital now with possible looming issues owing to slowing economy and the sovereign debt crisis affecting the eurozone. KfW might end up having to use their capital for more emergency investments. What financial institution would want to take on this investments, knowing they can’t sell it off on the market when times are tough?

German firms are balking and the government isn’t willing to to use their state bank to purchase the stake. Daimler wants this settled quickly.  All of this leaves a opening for Qatar.

Qatar wants EADS and it has been interested for several years. There were rumors a few years that the Qatar, using the Qatar Investment Authority purchased a small stake in the company by purchasing listed shares. It’s quite possible that the QIA does, in fact, have some kind of stake that’s below regulatory reporting requirements. The QIA has  6.22% voting rights in Lagardère. At the time, I thought investment in Lagardère was a play that would lead to EADS.

Besides the immediacy of the situation, there’s two major factors working in Qatar’s favor. The first is it has built up amazing political capital within France and Germany (while France is not directly involved with the Daimler, it would throw a fit if Germany sold it to a company or a country that it doesn’t approve of) If there’s one country that has committed to Europe over the last year as it has faced its sovereign debt crisis, it’s Qatar. Qatar has pledged $5 billion to Greece. Qatar has also made pledges of support to Germany and France’s economy. It has also backed up these pledges by continuing to make investments in both countries. There was even serious nogations over Qatar taking a stake in the French nuclear giant Areva

The second factor is Qatar would keep the status quo within EADS. The biggest single reason that Germany and France has insisted upon some type of ownership of EADS is jobs. Both countries want to keep them in their countries. They feel that if they lose ownership of the company, EADS would reverse years of corporate culture and decide to be efficient. This finding of efficiency would mean factories/jobs being move to other countries or regions. While not a full on guarantee, Qatar acquiring a stake would not be the worst nightmare for those German and France employees. Qatar would not force EADS to set up plants in their country. Jobs would be kept. EADS might start seeing more orders from some Qatari companies. There also might be a few JV set up between Qatari and EADS. Qatar would be more than happy to take part in any cash infusions EADS might need.

I might be oversimplifying the political issue that would surround the investment by Qatar. This is EADS. This is the French. This is the Germans. This is all three combined. But I truly think that Germany and its politicians have bigger things to worry about. An investment by Qatar would be welcomed, maybe not with open arms but won’t be come close to a Dubai Ports political scene.

So in my view, Qatar will be a owner of a large stake in EADS within the next year. I think Daimler will sell Qatar the the 7.5% stake outright within the next month. Daimler and Germany will wait for the other half until Lagardère sells its stake next year. Qatar will pick that other stake. Now about that Lagardère stake...

The FT's Beyond Brics has a post up updating Zimbabwe's indigenization law. The law calls for any large foreign company to sell a 51% stake to local Zimbabwe who are considered indigenous. As the post says:

An indigenous Zimbabwean is defined as persons who suffered under colonial-era racial discrimination and their children born after independence in 1980 – which in practice means mainly black Zimbabweans.

It's a good post and gives a good background on why this idea is a terrible idea. 
If a company does not comply, the law allows for the government to take over the operations of the company. It's sad that this law was passed, it's even sadder that the law is set to come into force. Enforcing this law will see either full scale nationalizations or a massive pull out of the few western companies still left in the country. 

Charles Ong, chief strategist at Temasek, has taken a leave of absence to join the newly created private equity firm RRJ Capital. He will joining a fellow Temasek alumni and his bother Richard Ong‎. This is another chapter in history of the Ongs and Temasek. This chapter might the one that is less than proper.

The problem isn’t that Charles shouldn’t get the chance to run a fund. His mid-career crisis should be encouraged. The problem is Temasek is blurring ethical lines with his transfer. It’s one thing to create a new fund or form a new subsidiary for one person’s benefit or to keep them from leaving. It’s another thing to loan out a person to a fund that should be in theory competing against Temasek. While RRJ has money in its fund from Temasek, beyond normal regular financial reporting, RRJ should not have any type of day to day communications with the firm. A strategic relationship would be different, but this isn’t one. I’m sure Ong has been busy signing confidential agreements. RRJ Capital should treat Temasek like any other shareholder/investor. I don’t think it’s possible to do that with Ong in the role that he is in.

While this is par for the the course with Middle Eastern SWFs, this type of arrangement is new with Temasek.

"They have found a home for him," said one banker who has dealt with Charles. "It does show that he is clearly not on the succession list," said the banker, who asked not to be named. "They are giving headroom to the younger lot to grow." (Reuters)

I would disagree. Temasek would not go though the trouble of transferring him, unless they want to keep him. It’s clear that Charles Ong wants a new challenge and has set a goal of creating a new investment fund as it. Temasek is willing to let him pursue it up to a point. Since the idea behind Seatown failed (whose fault it was is not clear), this is giving him another chance to create a fund.

Temasek will benefit from this move. It would benefit even more if they had create a new subsidiary with the Ong brothers. It could, I suppose, also let Seatown actually do what it was set up to do.

India has just made it easier for foreign funds to invest in listed companies.  From Beyond Brics,

The Securities and Exchanges Board of India said investors would be allowed to buy up to 25 per cent, up from the current 15 per cent threshold, before being forced to make a mandatory bid for the target company. The regulator also raised the mandatory offer to 26 per cent from the existing 20 per cent.

I think this will lead to a huge increase in the number of SWFs investing in India.  With most Indian listed companies being smaller in market capitalization compared to China, it's always been problematic for large strategic funds to invest in a suitable amount (over $100 million) without getting near the  threshold. In addition, with the focus of Indian media to reap coverage on any fund that comes close to the magic 15% number, SWFs or any fund were hesitant to go above 10% stakes. 
With Temasek already being quite active in the country and currently sitting on a fair amount of cash from their recent disinvestments from Bank of China and Agricultural Bank of China, I fully expect the Singaporean SWF to start making waves.