By Ilya Korzinkin, Mihir Gupta, Hugo Tay, Siddharth Sharma (University College London), Vincent Wess, and Julius Kalvelage (WHU)
Overview of the deal
On March 27 2019, Saudi Aramco announced that it had come to an agreement to acquire a 70% majority stake in SABIC from the Public Investment Fund of Saudi Arabia in a private transaction for a consideration of $69bn which results in no premium being paid. Saudi Aramco sees this deal as a milestone in accelerating the growth in its downstream unit, handling refining and petrochemicals. Aramco’s strategy includes roughly doubling the global refining capacity from 4.9m barrels a day to 8m-10m barrels per day by 2030, of which 2m-3m million barrels will be converted into petrochemical products. They see SABIC as a good strategic fit and a solid platform to execute this strategy. For the Public Investment Fund, the transaction frees up a significant amount of capital that will be used to further support the long-term strategy, underpinning sectoral diversification for Saudi Arabia away from oil export.
Acquirer: Saudi Aramco
Seller: Public Investment Fund of Saudi Arabia
Target: Saudi Basic Industries Corporation
Estimated value: USD 69.1bn
Announcement date: 27th March 2019
Acquirer Advisors: JPMorgan, Morgan Stanley
Seller Advisors: Goldman Sachs
Target Advisors: Citi
Company Overview Acquirer (Saudi Aramco)
Saudi Aramco (officially Saudi Arabian Oil Company) is an oil and gas company based in Saudi Arabia. The firm’s main operations are divided into the “upstream segment” and the “downstream segment”. The former includes activities revolving around the exploration and development of crude oil, natural gas and natural gas liquids. The latter is focused on refining and petrochemical manufacturing, as well as on supply, trading and distribution. Saudi Aramco is considered to be the most valuable and profitable company worldwide.
Founded in: 1933
Headquarters: Dhahran, Saudi Arabia
CEO: Amin H. Al-Nasser
No. of employees: 76,000
Market cap: USD 1,59trn
EV: USD 1,58trn
LTM Revenue: USD 329bn
LTM EV/Revenue: 4.1x
LTM EBITDA: USD 193bn
LTM EV/EBITDA: 8.2x
Acquirer Company Overview (Public Investment Fund of Saudi Arabia)
The fund is the sovereign wealth fund of Saudi Arabia and with total estimated assets of $320 billion one of the largest sovereign wealth funds in the world. It was founded for the purpose of investing on behalf of the Government of Saudi Arabia
Founded in: 1971
Headquarters: Riyadh, Saudi Arabia
Chairman: Mohammad bin Salman (crown prince of Saudi Arabia)
AUM: $320 bn
Target Company Overview (SABIC)
Headquartered in Riyadh, Saudi Arabia, SABIC (Saudi Basic Industries Corporation) is active in the areas of manufacturing, marketing and distribution of chemical, agri-nutrient and metal products in over 50 countries.
Founded in: 1976
Headquarters: Riyadh, Saudi Arabia
CEO: Yousef Abdullah Al-Benyan
No. of employees: 35,000
Market cap: USD 55.12bn
EV: USD 56.7bn
LTM Revenue: USD 37.21bn
LTM EV/Revenue: 1.5x
LTM EBITDA: USD 8.4bn
LTM EV/EBITDA: 6.75x
Short- Term Consequences
The diversification of Saudi Aramco revenue stream will provide a buffer against the current volatile oil price environment. By investing in SAIBC, there will be more upstream operations such as petrochemical production. Not only will this support Saudi Aramco downstream operations, by creating an internal market, but it will also increase the revenue streams for Saudi Aramco. This increased stability created by this merger will mean they will be less likely to push for further curtailments in oil production to support a profitable price level. However, the current demand side shock caused by COVID-19 may necessitate this action despite this revenue diversification.
Debt management is also necessary following this acquisition in order to facilitate both downstream and upstream operation. Saudi Aramco plans to issue a $10 billion bond to raise the funds required to acquire the majority stake in SAIBC. This is in part to ensure they are able to finance SAIBC gross debt, which stood at $13 billion in September 2019, in addition to any debts they themselves have, Coupled with the fact the payment plan is likely to be staggered, this will ensure that no cash flow problems will cause production issues to either downstream or upstream operations while ensuring there are no finance related layoffs.
Long- Term Consequences
The long term consequences of the deal are twofold. Firstly, the deal helps Armarco diversification. Aramco's alliance with SABIC matches in with a strategy to make the Saudi oil giant, except much larger than most other major international oil companies. Indeed, both IOCs have a very large presence in both the downstream and upstream and are gradually trying to dominate the natural gas industry and downstream. SABIC would send Aramco a major boost to its presence in Saudi Arabia's chemical industry and around the world. Secondly, the deal would help Aramco reap long term synergies. Traditionally, when chemical companies combine or purchase the businesses of each other, some of the products are the same and so production facilities can be rationalized and often closed to make room for the most productive within the combined companies. SABIC also produces a number of products manufactured by Aramco's affiliates— Sadara Chemical Company and Petro Rabigh— such as HDPE, LDPE, LLDPE, and a few amines. Consequently, a restructuring of companies can bring about a reduction of production lines, which would likely lead to a rationalization of facilities and workers. However, the ability to reap those synergies is largely dependent on the successful creation of specialist sales team. The chemical industry refers to such practices as "technical sales." They require a large number of salespeople with extensive industry knowledge, the comprehensive comprehension of the technical requirements of the markets, and immense expertise in chemical production. It takes many years to create all of that. Through entering the distribution network of SABIC, Aramco will be able to hit the running ground in its existing and future chemical outputs and reduce its dependence on its joint venture partners. In addition, Aramco's industrial products from its existing and potential refineries in China, South Korea, India, Malaysia, or Indonesia will be able to draw on SABIC's expertise and capabilities as it expands its downstream activities in Asia. SABIC even has large sales teams in Europe and the United States that would help any of Aramco's growth in the natural gas markets and downstream refining.
Risks & Uncertainty
The foremost risks that would be posed to Aramco’s profitability would be the volatility in oil prices due to both geo-political reasons and the current situation with regards to the Coronavirus pandemic. With worldwide supply chains getting disrupted and national governments transferring all of their fiscal ammunition towards combating this horrific virus, uncertainty is already infusing into the oil prices because of which wide scale slumps are being noticed in the commodity prices. Complementing this is the fact that Aramco recently in November disclosed an aggregate decline in et profits of approximately 18%. All of these can have trickle down effects overall valuation of the IPO which has been valued at a sum as high as $2 trillion. However, according to a survey conducted of the top 24 money managers by Bloomberg showed that more than 40% of the money managers put the company’s range at about $1.2-$1.5 trillion and another 25% valued it at sum drastically lower at about $1.1 trillion. It must be noted that these numbers were estimated at a time before the global economy was hit by the Corona outbreak.
The second risk pertains to the shareholder distribution for the company. A big concern for the potential shareholders can be the degree of influence they will have with regards to the company’s dominant shareholder, the Saudi Government. While Aramco’s goal is to sell a 2 to 5% stake in the company, what shareholders will not let go is of the fact that the state will still remain a majority shareholder thereby having limited influence on the company’s operations and what is to be done with the profits. As a result, it might be the case that investors demand a risk premium for that. A risk similar to this is faced by Russia’s state run gas giants Gazprom And Rosneft, whereby for e.g. Gazprom pays a 7% dividend yield, reflecting the risk of profits being channelled away into state coffers.
Lastly, Aramco’s vulnerability to attacks due to its geological position is bound to add to the potential risks for the company. Saudi Arabia’s involvement in the Yemen War and its tension with Iran are both significant factors that can have an ever-lasting impact on the financial supremacy of the company. The material damage that the company had to face because of these attacks had a significant impact on the profit figures.