By Cyril Widdershoven
The long awaited Saudi Aramco acquisition of Saudi Basic Industries Corporation (SABIC) is finally here.
With a statement to the press, Aramco CEO Amin Nasser reported that Aramco has acquired a 70 percent stake in SABIC, with an estimated value of $69.1 billion. Aramco’s CEO Nasser reiterated that the “deal is a major step in accelerating Saudi Aramco’s transformative downstream growth strategy”.
Aramco has acquired the shares from the Saudi Public Investment Fund (PIF) for a share price of 123.39 riyals, which is a slight discount from SABIC’s closing price on Wednesday. Analysts have been positive about the closing price, based on the fact that the acquisition is seen as a strategic, long-term investment, especially given that SABIC is one of the most defensive, non-cyclical segments.
Still, there could be criticism as Aramco has been looking at a much bigger discount during its negotiations the PIF. Nasser stated also that Aramco and SABIC together will be creating a stronger and more robust business that can meet rising demand for energy and chemicals products globally.
PIF’s CEO Yasir Othman Al Rumayyan stated that the deal is a win-win-win transaction, looking at the positive effects for Aramco, SABIC and the PIF at the same time. For the PIF, the objectives has been to generate additional cash for the SWF to invest and generate higher yields than it currently was able to. The PIF, as the main investment fund of Saudi Crown Prince Mohammed bin Salman, has been tasked to finance and support the ongoing economic diversification and liberalization of the Saudi economy, as indicated in Saudi Vision 2030 and the NIDLP.
Officially the deal is a real winner, looking at the positive effects following a merger between the world’s largest oil company and the world’s largest petrochemical company. With the acquisition Aramco will be able to reach its targets of increasing current refining capacity from 4.9 million bpd to 8-10 million bpd by 2030 much quicker. Of the latter 8-10 million bpd Aramco wants to convert 2-3 million into petrochemical products.
Still there is a long list of questions to be asked and answered. The first will be how to integrate SABIC’s Saudi and international business operations into Aramco, still largely a Saudi based and managed company. Without doubt Saudi Aramco’s managerial and technical standards and operations are top-class, several off them even better than most IOCs. The managerial changes currently ongoing inside of Aramco have propped up the company to become a major power player in- and outside the Kingdom. The situation within SABIC is different. The petrochemical giant is facing increased international pressure, but continues enjoy a strong position in Saudi markets and benefits from an active acquisition spree of the 1990s and 2000s. SABIC’s European and American based operations are up to speed, with its European subsidiary being a market leader. Inside of the Kingdom, SABIC’s historical position of being a leader, however, is under pressure, and some even state that without Saudi support, the company already would have faced major difficulties. Managerial issues are a challenge too and could possibly lead to conflicts or merger problems with its new mother company. Based on inside knowledge, Aramco will have to deal with a much more conservatively operated and managed new kid in the family.
A second question being asked at present is how the Aramco deal will be financed. Looking at the current cashflow of Aramco, the oil giant will not have a real problem to finance the deal, possibly taking part of the needed cash from the international financial markets. However, it is more likely that the deal will entail a spread financing arrangement in which Aramco will be able to pay over a prolonged period of time. This would also mean that the highly anticipated deal which was largely meant to generate additional cash inflows for the PIF is not as lucrative or effective as was expected by the media. With a long period of payments, the PIF’s cash influx is not going to be $69.1 billion in one go, but spread over years. This could mean that the SWF still needs to find additional funding sources for its national and international project acquisitions.
Mainstream analysis is again addressing the fact that the deal is being done to fund Crown Prince MBS’s Saudi Vision 2030. There are no clear indications at present that this is the case. The only option to push MBS’ dream forward much quicker is to fully finance the Aramco-SABIC deal by international debt. Even with several large bond issues, MBS will not generate $70 billion in one go. Aramco’s management is also too conservative or prudent in its investments to take this route without caution. By entering the international capital markets, Aramco will be forced also to open up its books and present detailed financial statements to potential financial institutions.
A possible other not yet addressed issue is the fact that with the SABIC acquisition, Aramco has become a fully integrated international oil company. By taking over SABIC operations worldwide Aramco also has not only increased its exposure globally to downstream but also to possible geopolitical issues or legal threats, such as NOPEC or the Justice Against Sponsors of Terrorism Act (JASTA). By becoming a major downstream giant, Aramco has entered the premises of IOCs, traders and chemical producers worldwide. Competition will be fierce, demanding major changes within the SABIC operations worldwide and adjusting the upstream focus of Aramco with a bang. As stated by Aramco, it has appointed banks, such as JPMorgan Chase & Co., Morgan Stanley, Citigroup Inc., HSBC Holdings Plc and National Commercial Bank to manage a potential bond sale.
Finding enough appetite in the market for a Saudi bond sale is still an issue. Geopolitical risks and concerns about the internal stability of the Saudi royal family could decrease the appetite of major financial institutions. The Kingdom might be listed on several emerging markets indexes (FTSE/MSCI), but investment appetite is being constrained by the impact of the Khashoggi murder, increased volatility in oil markets and pressure on the position of the Crown Prince.
Some analysts are expecting the Aramco-SABIC merger to be a major step forward in the Aramco IPO. Looking at the need for financial reporting and opening up the books of Aramco, a full scale downstream IPO, including SABIC operations and assets can now be considered.