Thursday, March 28, 2019 05:20 PM / By Cyril Widdershoven for
Oilprice.com / Header Image Credit: Nytimes
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
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
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.
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