Mubadala plugs in to GE venture

Wayne Arnold

• Last Updated: July 23. 2008 12:38AM UAE / July 22. 2008 8:38PM GMT

Jeff Immelt (right), the chief executive and chairman of GE, with Khaldoon Al Mubarak, the chief executive of Mubadala. Joe Tabacca for The National

Mubadala Development Company yesterday unveiled a wide-ranging agreement with General Electric that will create a US$8 billion (Dh29.3bn) financing venture in Abu Dhabi and turn the Emirati firm into one of the largest shareholders of the company founded by the American inventor, Thomas Edison, more than 130 years ago.

The agreement, which includes joint investments in carbon-free energy, oil and gas, aviation and executive education, matches Abu Dhabi’s ambition to diversify its oil-based economy with GE’s need to shore up profits and a flagging share price.

Mubadala, Abu Dhabi’s Government-run venture capital firm, and GE said they would create a globally focused business finance unit headquartered in Abu Dhabi within the next year, with each company investing $4bn over a three-year period into the venture. Mubadala also said it intended to begin buying shares in GE with the intention of becoming one of its 10 largest institutional shareholders, which at GE’s current share price would represent an investment of at least $3.3bn.

“It’s a very good fit between Mubadala and GE,” said Khaldoon al Mubarak, Mubadala’s chief executive and managing director. “There’s definitely a clear match that’s always been there.”

Sovereign wealth investors have become an increasingly important – and controversial – source of funding for US corporations. Abu Dhabi Investment Authority’s (Adia) $7.5bn purchase of a 4.9 per cent stake in Citigroup last year was the cornerstone in a growing portfolio of US assets by Abu Dhabi’s funds, cemented earlier this month by the Abu Dhabi Investment Council’s purchase of a stake in Manhattan’s Chrysler Building.


“To whatever extent they can reduce costs of capital by tapping sovereign wealth funds, this becomes an attractive source of funds for US corporations,” said John Lonski, a managing director at Moody’s Investors Service, the New York ratings agency.

Mubadala was created in late 2002 with a mandate to invest in hi-tech industries that help diversify Abu Dhabi’s economy or promote the emirate’s development. With an estimated $10bn in assets, Mubadala is a minnow next to its much larger sibling, the Adia, which analysts estimate ranges in size from $500bn upwards.

But Mubadala has made waves under the direction of Mr Mubarak, who became the chief executive in 2005. Mubadala’s investments so far range from the high-flying – such as its five per cent stake in the luxury sports car maker, Ferrari – to the heavy-hitting, like its $1.35bn purchase of a 7.5 per cent stake in the private equity giant, Carlyle Group.

GE, America’s fourth-largest company, has been struggling with disappointing earnings and a share price that has stumbled 25 per cent so far this year.

The company was hit hard by the subprime crisis, losing about $1bn on a subprime lending unit called WMC Mortgage.

Shareholders and analysts have called on the company to focus on its fastest growing businesses and shed other assets, prompting Jeffrey Immelt, the chairman and chief executive, to announce earlier this month that GE would spin-off or sell some of its biggest companies, including its $30bn credit card business, its consumer and industrial division and its appliances unit.

GE’s stock rose by almost two per cent in early trading following yesterday’s announcement.

Mr Lonski said Mubadala’s plans to buy a significant stake in GE were unlikely to stir the same kind of controversy that sovereign fund investments did earlier this year. “Congress realises all too well by now the problems we’re having in the financial sector. We may lack the capacity at this point in time to supply financial capital at reasonable costs, without which economic performance would worsen.”

Mr Immelt yesterday sought to downplay the political implications of the deal. “I don’t consider Mubadala a sovereign fund. This is a commercial company, very focused on driving excellence on a global basis,” he said. “I don’t think this has a political angle to it.”

Likewise, Mr Mubarak stressed the deal’s importance in creating a new venture for commercial finance. “This is not about a fund investing as a fund. This is about business development.”

While Mubadala still does not own any GE stock, he said it would be building its stake gradually, satisfying any regulatory requirements along the way.

The two companies have been working together for four years and already jointly manage an infrastructure fund.

Each of the partners will allocate $4bn in equity over three years to set up the commercial finance unit in Abu Dhabi, staffed by employees from GE and ­Mubadala.

That $8bn is merely the beginning, however: the new venture aims to build a loan portfolio in excess of $40bn, a sum Mr Mubarak said it would raise by borrowing money.

“It’s aggressive, but we think the opportunities are there, especially for investors like us with a long-term mindset.”

Mr Mubarak said Mubadala’s investment in GE and the new joint venture would be its largest to date. Mubadala would use part of its existing assets to pay for the stake, he said, and was planning to raise additional funds by issuing bonds. He said Mubadala was in the process of seeking a credit rating as part of that plan.

In the area of clean energy and water research and development, the two companies agreed to set up a clean energy technology centre located in Masdar City, the planned carbon-free, zero-waste city in Abu Dhabi.

“The centre will house up to 100 technologists developing new sustainable energy, water and environmental technologies,” the joint statement said.

GE will commit $50 million to a clean technology fund under Masdar, while Mubadala will invest up to $200m to a GE initiative providing growth capital to companies in the health care, energy and transport sectors.

GE and Mubadala will also expand aircraft maintenance services in the region and will widen the scope of a turbine service ­centre.

And GE will manage a new corporate learning programme within the Masdar facility, based on its US executive education programme, from the first quarter of next year.

* Additional reporting by Tom Ashby, Asa Fitch and Bradley Hope

warnold@thenational.ae