Complex Made Simple

Saudi Aramco has a trick up its sleeve to cash in without an IPO

Khalid al-Falih, Saudi energy minister and chairman of Saudi Aramco has said there is a commitment to listing the company.

“But despite his comments, there are indications that the country is unwilling or unable to currently do so when conditions are optimum, at a time of its choosing,” said Business Insider.

The Aramco IPO is currently not on, and that has left investment banks, who had hoped to grab a slice of the fees that a 5% listing of a potential $2trn valuation could bring, frustrated.

Not to worry though. There’s plenty of work for them to do, not only around the kingdom but with Aramco itself which has a few ways it can generate massive cash flow for everyone around it.

Read: Despite reports, Saudi not abandoning Aramco IPO: Here’s why

Saudi still a magnet  

“Investment banks which lost out on big payouts for the work on the shelved listing of oil giant Aramco are lining up for a raft of other projects as Saudi Arabia pursues reforms,” announced Reuters.

It’s a known fact that banks including JPMorgan Chase & Co. and Morgan Stanley has for the last 2 years or so shuttled between the US, Europe, and Saudi in an effort to provide advice and prepare for what would have been the biggest ever stock market debut.

“The bankers were paid retainer fees, but were expecting around $200 million to be shared among the banks involved when the deal was done,” said Reuters, quoting bankers telling it.

“Now, they are pinning their hopes on other projects including a privatization program that is part of Riyadh’s economic-reform plan to loosen the country’s reliance on oil.”

Analysts expect general privatization efforts to generate between $9 billion and $11billion by 2020, numbers which are too big for bankers to ignore.

This doesn’t include raising funds for the partial or full buyout of petrochemicals firm Saudi Basic Industries (SABIC).

“Teams from JPMorgan and Morgan Stanley have been shifted to advise on Aramco’s planned acquisition of up to US$70-billion of SABIC,” three people familiar with the details of the transaction said.

Read: Aramco IPO: A done deal, or a pipe dream?

They added that HSBC Bank is expected to play a role in putting together the debt to fund that purchase.

This could prove to be lucrative, as SABIC is valued at $70bn, should all its shares owned by the Saudi Public Investment Fund (PIF) be purchased.

PIF owns 70% of SABIC shares. The other 30% are owned by minority investors.

for investors, there are other deals looming on the horizon.

“The PIF has had to reconsider its budget in the last three months, after finding out that they wouldn’t be getting $100-billion from the Aramco IPO right away,” a banker in Saudi Arabia told Reuters.

“So there’s been a flurry of activity as they look to raise cash in other ways. A lot of these are smaller deals, $1-billion here and there, but all geared toward financing their commitments for big infrastructure projects without slowing down their timelines.”

Read: Aramco goes electric with Mazda, Saudi PIF goes Tesla: Here’s why

Creative funding for SABIC buyout

Aramco can resort to traditional bonds and bank loans to raise cash and finance the acquisition of SABIC.

“Trouble is, a big global bond issue would require Aramco to reveal detailed financial results for the first time,” according to, an Indian financial daily newspaper.

“Aramco could be tempted by an alternative path that employs a private-equity style leveraged buyout (LBO) and ensures Aramco’s numbers stay under wraps: using Sabic’s balance sheet to help pay for the deal.”

The paper quoted Sriharsha Pappu, global head of chemicals research at HSBC Bank Plc, saying in a note to clients: “Aramco could, in theory, partially fund the stake purchase via an LBO.”

Pappu explained the LBO deal would work if Aramco puts as much as $40 billion of debt “on Sabic’s balance sheet and paying a special dividend” of a similar amount to itself that would cover a large chunk of the price tag.

The daily said Sabic has cash and equivalents of about $17 billion matching its debt, earned in 2017 nearly $14 billion, enabling it to support net debt of about $35 billion, using a net debt-to-EBITDA ratio of 2.5 times, the typical limit for an investment grade company.

Related: Saudi Aramco raising billions to buy Sabic: Smart but will it work?

Patent happy

Saudi Arabia’s state oil company is working to turn itself into an innovation powerhouse while its much-delayed plans to go public remain on hold, according to the Wall Street Journal (WSJ).

WSJ said the U.S. Patent and Trademark Office granted Saudi Arabian Oil Co., better known as Aramco, 230 patents last year, four times as many as in 2013 when it racked up just 57.

“That placed Aramco third among oil-and-gas exploration and production companies that year, far behind Exxon Mobil Corp. but close to Chevron Corp.”