Saudi Aramco may take controlling stake in SABIC, delaying IPO

Saudi Aramco has reportedly hired JPMorgan Chase and Morgan Stanley to advise it on the SABIC acquisition.
Sunday 05/08/2018
Chief Executive Officer of ARAMCO Amin Nasser speaks during an interview in Dhahran in Saudi Arabia. (Reuters)
Managing delays. Chief Executive Officer of ARAMCO Amin Nasser speaks during an interview in Dhahran in Saudi Arabia. (Reuters)

An interesting wrinkle is unfolding in the two-and-a-half-year-long saga of whether the Saudi government will sell a stake in its crown jewel — state oil and gas conglomerate Saudi Aramco — through an initial public offering (IPO).

This development ironically involves one state industrial power becoming a majority shareholder in another state industrial giant to plump up the kingdom’s sovereign wealth fund and help foster economic investment in the kingdom.

Such a purchase raises questions of whether a large cash infusion into Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), eliminates the need for the Saudi Aramco IPO or strengthens the energy firm’s corporate profile ahead of a limited sale, which is now unlikely to take place until at least 2020.

The government of King Salman bin Abdulaziz Al Saud is pressing Saudi Aramco to raise cash through domestic and international bond issuances and tap into bank loans to purchase most or all of the Saudi government’s controlling stake in state petrochemical firm Saudi Basic Industries Corporation (SABIC). The Saudi government’s 70% stake in SABIC is technically owned by the PIF, which has become the investment vehicle for revamping the kingdom’s economy as part of Saudi Vision 2030.

Saudi Aramco said it is in early stage discussions with the PIF to acquire a stake in SABIC via a private transaction, with no plans to buy publicly held shares. The PIF’s stake in SABIC is valued at about $70 billion. SABIC, the world’s fourth largest petrochemical firm, has a market capitalisation of $104 billion with 30% of the company listed on Tadawul, the Saudi stock exchange.

Riyadh has faced numerous setbacks since it announced in January 2016 that it planned to sell up to 5% of Saudi Aramco’s shares. The initial plan was to have the IPO in the latter half of 2018 but slipped into 2019 as Riyadh encountered serious concerns, including questions of transparency in providing critical production and economic data that foreign bourses and investors would demand, as well as legal risks from listing internationally and the government’s desire for higher oil prices to support a greater valuation for the state company.

Saudi Aramco CEO Amin Nasser indicated in a July 20 interview with Saudi state-owned Al Arabiya television that purchasing shares in SABIC would make Saudi Aramco less vulnerable to price volatility but that the sale process would affect the timing of the Saudi Aramco IPO.

“If the deal is completed with relevant regulations taken into account,” Nasser said, “it will definitely affect the time frame for the partial IPO of Saudi Aramco.”

There is doubt about whether the Saudi Aramco IPO will happen even though it is the cornerstone of Vision 2030. Saudi government officials, including Crown Prince Mohammed bin Salman bin Abdulaziz, have said that proceeds from the IPO could generate as much as $100 billion for the PIF to use for investing at home and abroad.

The delay in the IPO has put political and fiscal pressure on the Saudi government, which may explain the proposal to effectively transfer state assets to provide income for the PIF to spur investment and stimulate the domestic economy, including job creation.

Raising cash for the PIF through Saudi Aramco’s purchase of SABIC shares would help the government counter criticism that little has materialised from the ambitious Vision 2030 programme and put off difficult decisions regarding the Saudi Aramco IPO. The Saudi leadership may feel that a cash injection of $50 billion-$70 billion from the Saudi Aramco-SABIC deal is close enough to the promised $100 billion revenue from the IPO that there is no urgency to sell a stake in the prized state oil and gas firm.

Saudi Aramco has reportedly hired JPMorgan Chase and Morgan Stanley to advise it on the SABIC acquisition. To raise funds for the purchase, the energy conglomerate is expected to issue a $2 billion tranche of Islamic debt in the form of sukuk, which would be followed by a substantially larger international bond issue. Ironically, Saudi Aramco may have to be as transparent to potential bond investors about key oil and gas reserves and financial data as it would to IPO investors.

Merging Saudi Aramco’s considerable petrochemicals businesses with SABIC’s expansive petrochemicals empire would dramatically boost its downstream portfolio domestically and internationally, whether or not the Saudi government ultimately launches the Saudi Aramco IPO.

It is telling, though, to look to comments made two years ago by Crown Prince Mohammed about the Saudi Aramco IPO and the prospect of combining petrochemical assets from the two state industrial giants before shares were put on offer. The Saudi leader said at the time: “SABIC and Saudi Aramco are two independent companies but both will have a majority ownership by PIF.”