Abu Dhabi takes 8% stake in AMD

Advanced Micro Devices, the world’s second largest microprocessor maker, confirmed that Abu Dhabi government’s investment arm had bought an 8.1 per cent stake in the company for $622m, in a deal which underlines the growing purchasing power of sovereign wealth funds around the world.

Mubadala Development bought 49m shares at Thursday’s closing price of $12.70. AMD received $608m after paying Mubadala’s expenses.

AMD shares initially rose 20 cents to $12.90 before trading flat at $12.70 at midday after analysts and a rating agency said the cash injection would still leave AMD facing challenges.

The Silicon Valley company reported its fourth consecutive quarter of losses last month in the face of tough competition from larger rival Intel, the world’s biggest chipmaker. Intel has a market capitalisation more than 20 times that of AMD.

Standard & Poor’s Ratings Services said the sale would not affect its B/Negative ratings or outlook on AMD.

“The company has a large debt burden and has had substantial negative free cash flows. We view the transaction as favourable to the business, but not likely to affect the underlying competitive challenges facing the company,” it said.

AMD reported a consolidated debt of around $5.3bn at the end of September. Its finances were stretched by its biggest acquisition last year – it bought ATI, the Canadian graphics chip company, for $5.4bn.

It netted $1.48bn from a 5.75 per cent convertible debt offering in the third quarter and used the proceeds with additional cash to repay a $1.7bn loan used to acquire ATI.

Analysts at Citigroup said AMD needed $500m to comfortably manage its business. Before the Abu Dhabi investment, its cash balance would have fallen below $500m in the September quarter next year.

They added that AMD’s competitive position in the microprocessor market had improved little, with its Barcelona chip introduced in September lacking the range of speeds of its rival Intel’s chips.

AMD said it would use the proceeds from the stake sale for general corporate purposes, including investing in research and development, product innovations and manufacturing excellence.

The new investment is the latest high profile investment a sovereign wealth fund.

On Wednesday, the US Treasury Department renewed its call on the International Monetary Fund and World Bank to develop a list of best practices for sovereign wealth funds to help ensure investments controlled by foreign governments were transparent and made for economic rather than political reasons.

The power of sovereign wealth funds - especially the oil-rich funds within the Middle East - is set to increase, according to the IMF’s latest macroeconomic forecasts released this week.

With oil prices touching record levels, the fiscal surpluses in the Middle East region will also significantly increase, diverting increasing amounts of liquidity into the global acquisition trail.

With regional growth pegged at 6-7 per cent, the main threat to the oil-rich Gulf states remains inflation, which has risen to almost 10 per cent for the region’s oil exporters, compared with 7 per cent last year.

In September, Mubadala bought a 7.5 per cent non-voting stake in Carlyle, the US buy-out firm, for $1.35bn. In an unusual move, Carlyle guaranteed a floor to Mubadala’s investment, pledging to compensate the arm of the oil-rich emirate if Carlyle goes public and the share price drops.

Mubadala is being advised by Lehman Brothers and Morgan Stanley. It was established in 2002 with a mandate to acquire strategic holdings in existing companies, both in the United Arab Emirates and overseas.