Twenty years ago, it would have been strange to see newly formed Arab companies do business that spawns continents and create a behemoth infrastructure within any industry, let alone chemicals.
These days, it’s just another headline.
Borouge and OMV will create a $60 billion chemicals behemoth – the 4th largest polyolefin company in the world, overtaking Sabic, and with a projected market size of $305 billion by 2030.
There will be a new holding structure by ADNOC in the meantime, through XRG, formed in November 2024 with a value of $80 billion and holding stakes in joint ventures with the likes of Exxon Mobil.
ADNOC’s stake in the combined Borouge group will be moved into it is part of the dazzling series of transactions that is expected to see shareholders benefit from a 90% dividend payout ratio. (There will be an at least a 2% uplift in dividend yield).
Nova Chemicals too is part of the mix. It is owned by Mubadala and has an enterprise value in excess of $13.4 billion.
Of course, one could analyze the synergies behind this transaction, or the new clout that the ADNOC Group will have in industries ranging from home insulation, construction and premium chemicals. But it is clear that this chemical powerhouse has been part of the UAE’s broader focus to become specialists in all things infrastructure-related.
UAE takes a first principles approach
This is a return to first principles that other Western countries once had but lost. There is an emphasis on how money is made rather than how much. Plus, there is a focus on the factors of production rather than just mere consumption. And the fact that trade and capital surpluses in the rapidly changing geopolitical theater is not something that can be lost to long-term goals.
These are high-value objectives and deserve a lot more discussion. It is no surprise that this saga has been far more extensively covered in the Western media than it has domestically.
Even if we were look at the valuations of the combined entity, we see that it will have an earnings yield far superior to its Western counterparts. This is the raison d’etre of companies getting together, to create value for shareholders, both in the form of higher dividend payouts and to carve out larger market shares in volatile sectors that allow it to achieve economies of scale from superior production and higher margins.
Right move for overvalued asset markets
Index-based investors argue that as markets become more efficient, it is best to invest in ETFs, ignoring the data that suggests otherwise in emerging markets (and the price reaction as well).
Skeptics have already argued that perhaps ADNOC has overpaid. There is no end to this hypothesis that suggests that foreigners, flush with money, will overpay and get taken for a ride.
The irony of this sentiment is self-evident, with the valuations of the technology sector and large swathes of the US and Western equity markets that appear wildly overvalued. Even as these specialty sectors have traded in the low double-digit multiples.
Once again, analysts have had no problem downgrading stocks with high free cash flow margins, only to upgrade the latest AI stock in a repeat of the mania that has cursed the markets ever since the one over tulips.
This latest deal signals to the world that the UAE is a force to be reckoned with in the next stage of hyper-capitalism. Its capital markets are and will continue to reflect its increasing prominence as the paradigm of investing shifts towards the Middle East.
