Saudi’s Aramco plan B is too clever by half

Bankers are working on a financing package of up to $70bln to back Aramco’s acquisition of a majority stake in SABIC

  
Amin H. Nasser, president and chief executive officer of Saudi Arabian Oil Company (Saudi Aramco), speaks at the China Development Forum in Beijing, China, March 19, 2017. REUTERS/Shu Zhang

Amin H. Nasser, president and chief executive officer of Saudi Arabian Oil Company (Saudi Aramco), speaks at the China Development Forum in Beijing, China, March 19, 2017. REUTERS/Shu Zhang

REUTERS/Shu Zhang

LONDON (Reuters Breakingviews) - Mohammed bin Salman’s financial engineers are earning their fees. Plans for the Saudi crown prince to spearhead a triumphant listing of domestic oil titan Aramco are on ice, but his advisers have a workaround - Aramco may now create the cash itself by borrowing money and buying a stake in chemicals group. It’s a clever idea, but no substitute for plan A.

Looked at as a piece of corporate strategy, splicing together Aramco’s huge oil reserves with SABIC doesn’t automatically create much value. It makes more sense to see the leveraged acquisition as a way to replace the $100 billion that won’t materialize if Riyadh fails to list Aramco. If the similarly state-owned Aramco buys the stake then the Public Investment Fund, earmarked as the engine for the crown prince’s Vision 2030 drive to diversify away from oil, would still have a chunk of cash for pursuits such as investing with Masayoshi Son’s Vision Fund.

Aramco can probably afford the move. It has minimal debt, Bloomberg reported on April 13, and made over $34 billion of net income in the first half of 2017. With a probable value exceeding $1 trillion, bond markets and banks would be happy to provide it with the roughly $70 billion it would need to buy the 70 percent stake in SABIC. And gearing up Aramco avoids many of the pitfalls of a listing: the state would not need to keep investors sweet with high dividends, and the crown prince can avoid the embarrassment of an IPO failing to reach the $2 trillion value he sought.

That’s all very well. But neither Aramco nor SABIC are as keen on the deal as the prince’s advisers, the Wall Street Journal reported on July 26. If Riyadh were not wrestling with a large budget deficit, it’s hard to imagine it would be using its crown-jewel oil company to raise cash. Even if the financial risks are low, the plan falls short of the ambition of the original Vision 2030 strategy. The Aramco listing promised to diversify the state’s risk from petrodollars, while opening up Saudi equity capital markets. This is a funny way to do so.

CONTEXT NEWS

- Bankers are working on a financing package of up to $70 billion to back oil giant Saudi Aramco’s acquisition of a majority stake in Saudi Arabia Basic Industries Corp (SABIC), Reuters reported on July 27.

- Aramco is aiming to buy a controlling stake in the petrochemical outfit, and could buy all of the 70 percent stake owned by the Public Investment Fund, Saudi Arabia's top sovereign wealth fund, Reuters reported.

- Riyadh-listed SABIC, the world's fourth-biggest petrochemicals company, has a market capitalisation of 385.2 billion riyals ($103 billion), and a 70 percent stake would cost roughly $70 billion.

- JPMorgan and Morgan Stanley have been picked to advise on the deal, Reuters reported. Aramco could tap international bond markets for the first time, Bloomberg reported on July 26.

- Saudi Crown Prince Mohammed bin Salman's advisers see a deal between the kingdom's two largest companies as central to remaking the economy now that the IPO of Aramco is on hold, officials and executives told the Wall Street Journal in a story published on July 26.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to fix formatting issue.)

(Editing by Neil Unmack and Martin Langfield) ((george.hay@thomsonreuters.com; Reuters Messaging: george.hay.thomsonreuters.com@reuters.net))

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