This article has been written by Aura Das, pursuing the Diploma Programme in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.
An asset transfer deal or an acquisition by the way of an asset deal is a convenient way of acquiring the stakes of a company. There is numerous ways of acquiring an entity, acquisition by the way of purchasing assets has its own benefits and is also less time-consuming than other methods of acquisitions. One of the recent asset transfer deals which took place is the one involving TAQA, a utility company based in UAE, and its parent company ADPower, making it the majority shareholder of TAQA. The details of the deal are analyzed below.
What is an asset transfer deal?
In an asset transfer deal, the acquirer or the buyer aims to purchase selected assets of the target company. It is a type of acquisition transaction wherein certain consideration is paid for acquiring the selected assets of a company. The assets are generally purchased at a fair market value. It is different from a stock acquisition where the whole business unit is acquired as a going concern. The assets purchased can be either tangible or intangible assets. The target company or the seller’s company continues to cooperate as a going concern after the transaction.
An asset transfer deal is undertaken by entering into an asset purchase agreement by both parties. This agreement stipulates the details related to the transaction such as the assets transferred, valuation of the assets, types of assets, payment method and consideration to be paid, representations, warranties, indemnities, and other standard terms.
The advantage of an asset transfer deal is that the acquirer can reduce tax obligations by obtaining tax deductions for depreciation. The acquirer also has the right to limit himself from acquiring liabilities or assuming any liabilities in the transaction. After thorough due diligence, the acquirer gets an idea of all the assets and can choose accordingly. Unlike stock acquisition, minority shareholders do not have to be taken into account to give their consent for an asset transfer deal.
There are several disadvantages that do come with an asset transfer deal. As the tax obligation on the seller is higher, the seller or the target company may insist on a high purchasing price. Several contracts with respect to customers, supplies, and leases may have to be renegotiated or renovated by the acquirer. Issues related to the employees who would get affected by the deal need to be dealt with such as the renegotiation of employment agreements.
Background of TAQA
Abu Dhabi National Energy Company, also known as TAQA is a diversified international energy group headquartered in Abu Dhabi. It is a major utility company in the EMEA region having power, oil, and gas operations in 11 countries. It aims at providing efficient resources of sustainable energy and water to the people. It was established in 1998 after the power and water sector of Abu Dhabi was privatized and the importance of water security and power resources was taken into account. TAQA was then established as a publicly listed company in 2005 on the Abu Dhabi Securities Exchange (ADX). They have successfully expanded their energy and water business in countries like Canada, Ghana, Oman, Saudi Arabia, United Kingdom, Iran, Iraq, Oman, Netherlands, and the United States. TAQA is majorly owned by Abu Dhabi Power Corporation (ADPower) with 98.6% of shareholding with AD Power and the rest being public shareholding. AD Power is a wholly-owned subsidiary of ADQ, one of the wholly-owned strategic investment companies of the Emirate of Abu Dhabi. AD Power is a publicly listed company that owns most of the electricity and water supply businesses across the Emirate. It is also one of the largest government-owned holding companies headquartered in Abu Dhabi.
In February 2020, the Board of Directors of TAQA received an offer from ADPower for an asset transfer deal. As per the terms of the offer received, ADPower in exchange for 106,367,950,000 shares of TAQA would transfer assets to TAQA and terminate the land lease agreement between ADPower and TAQA. By this share acquisition, TAQA would earn approximately 17.5 new shares for each existing share transferred to ADPower. The equity value of TAQA after including the valuation of the contributed assets of AD power was calculated to be AED 4,156million (approximately USD 1345 million).
The assets which were a part of the offer received from ADPower included most of ADPower’s water and electricity generation, transmission, and distribution assets, making it one of the major players in the UAE in the utility sector. Post completion of the deal, ADPower was purported to own 98.6% of the total issued share capital of TAQA. The deal was subject to approval from sectoral regulators such as the Abu Dhabi Department of Energy(DoE), the Securities and Commodities Authority (SCA) as well as the shareholders of TAQA.
The shareholders of TAQA representing more than 89% of TAQA’s share capital approved the offer in April 2020 and the deal was formalized and completed in July 2020, with the transfer of majority of power, water generation, transmission, and distribution assets of ADPower to TAQA. In pursuance of the transaction, TAQA is now the third-largest publicly traded company of UAE in terms of market capitalization and is among the top ten players in the integrated utility sector in the EMEA region. Presently, all of Abu Dhabi’s power and water transmission and distribution companies are owned by TAQA including its international assets in India, Ghana, Canada, Netherlands, Oman, Morocco, Saudi Arabia, United Kingdom, and the United States.
Why was the deal closed?
The major push behind this transaction was for the government of Abu Dhabi Emirate to consolidate various companies in order to boost the oil-dependent economy amidst the added pressure on growth caused by the pandemic. With TAQA having its assets in numerous countries like Canada, the US, and UK, etc, it was intended that this transaction would significantly enhance its asset portfolio. The successful consolidation has spearheaded its position to be a national energy champion as it now has the capacity to transform and impact the utility sector in a great way. This transaction also optimally positions TAQA as the leader in the regional market in the sector of power, water, transmission, and Distribution Company. It now plays an active role in UAE’s strategy to diversify its presence in various nations and strong capital flow, industry expertise and access to global capital markets would help UAE to establish itself in the field of clean resources and utilities. TAQA’s synergy with ADPower along with their strategic and operational expertise would yield huge profits and consistent dividends to their shareholders, making it a lucrative option of investment. This transaction also ensures that the company will have a long-term capital structure and a stable income as more than 85% of its revenues would be generated from the regulated and long-term contracted business.
Parent companies benefit from owning subsidiary companies as they have controlling rights of the subsidiary company which can later be acquired to integrate with their business and benefit from it. Generally, such integrations are done as a strategic investment to diversify or become a dominating player in the respective field. Such integrations also help in boosting the economy of a nation by increasing the inflow of capital and culmination of resources and expertise to produce better services.
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