What is the avant-garde tie-up Adani and Aramco are exploring?

Gautam Adani, chairman, Adani Group, is reported to have gained $49 billion in personal wealth over the last one year.
Gautam Adani, chairman, Adani Group, is reported to have gained $49 billion in personal wealth over the last one year.

Summary

  • To partner Adani is to partner India’s growth story, one of the more robust ones in the emerging world. Adani has proven execution capability and is widely perceived to be in the good books of the Indian government

The Adani group is reportedly exploring a tie-up with Saudi Aramco and the oil kingdom’s Public Investment Fund. Bloomberg suggests that rather than investing cash, Gautam Adani seeks to invest with his shares, offering potential partners a stake in his group. It makes sense for companies like Adani to strike share-swapping deals before the switch by the world’s major central banks from ultra-loose monetary policy to inflation-killing hawkishness. The Indian billionaire is on the look-out for a number of acquisitions, not just this one deal with Saudi outfits.

Adani is entering Sri Lanka’s renewable energy sector, is in the race to buy a renewable energy company in India, is bidding for a bankrupt non-banking finance company, has bought into a media business in India, tied up with a Canadian firm to make hydrogen fuel cells, and expanded its investments in power and airports.

Adani is among the world’s billionaires who have seen their fortunes soar even as global economies declined in the wake of the pandemic. The ultra-loose monetary policy pursued by the US, Europe and Japan to insulate their economies from pandemic-induced economic woes has pushed liquidity into the world’s stock markets. Well-performing companies have seen sharp rises in their valuation on the markets, even as mediocre companies too saw their stock prices buoyed by the trillions of dollars of additional liquidity the developed world has created by way of fiscal support and asset purchases by central banks. Gautam Adani, the head of the Adani group, is reported to have gained $49 billion in personal wealth over the last one year, as a result of this process.

The US Fed has announced that it would raise rates six times, starting with the 25 basis-point increase it put in place last week. Other central banks are expected to follow suit. Stock prices are slated to come down and yields to go up.

When stock prices are at their peak is the best time for companies to go on a global shopping spree for other companies. Since the acquirer’s stock price and the acquiree’s stock price are both slated to come down, it might appear, at first blush, that there is no great advantage in timing the transactions. This would, however, discount the faster past run-up in emerging market stocks, particularly India’s, and the likelihood a faster run-down of these stock prices as well. So, it makes sense for Gautam Adani to go on an acquisition spree before stock prices dip. How does it make sense for his acquisition targets to go along and finalize the deals at a time when Adani shares are potentially on the verge of decline?

To partner Adani is to partner India’s growth story, one of the more robust ones in the emerging world. Adani has proven execution capability and is widely perceived to be in the good books of the Indian government. It makes sense for foreign companies seeking diversification and growth to partner with Adani.

For sovereign wealth funds such as Saudi Arabia’s PIF, the freezing of Russia’s external reserves and the assets of its sovereign wealth fund send out the clear signal that it is far more prudent to invest surplus cash in real assets in fast-growing economies than to hold bank accounts or government bonds in rich countries.

Such factors compensate the likelihood of a faster decline of Adani shares as compared to the shares of its partners from economies with stock markets less bouncy than India’s.

It is tempting to read into Adani’s tie-up with Saudi Aramco a desire to compete with Mukesh Ambani, whose proposed partnership with Aramco failed to materialize. Adani and Ambani have the conglomerate DNA: their strength comes not from sticking to the knitting while mouthing mantras about core competency, but from seizing opportunities that present themselves in diverse sectors and making good on these with their execution capability, of which getting government support is a key component.

The PIF is interested in India’s infrastructure sectors, which can only grow as India continues to grow and urbanize. Adani is a major player in infrastructure and in renewable energy, with its green hydrogen plans. Their partnership makes sense for both parties for the kind of diversification each seeks to achieve.

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