Complex Made Simple

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

Saudi is thinking hard and thinking smart, killing more than one bird with one big stone, and reviving hopes of a much bigger windfall.

Why not let Aramco buy a piece of Sabic, which is already 70% owned by the Public Investment Fund (PIF)?

The PIF expects to become the largest sovereign wealth fund in the world with assets of $2 trillion by 2030 and generate returns targeted at 8% to 9%.

Last October, the fund said it managed $225 billion worth of assets.

In 2016, it was announced that the PIF will seek to list 5% of Aramco’s shares by 2017.

That didn’t happen, yet.

Proceeds from the IPO, originally estimated at $100bn from a 5% sale of a $2trn estimated value for Aramco will go to the PIF.

Ownership of the remaining 95% of Aramco will also be transferred from the government to the PIF, according to numerous reports.

That didn’t happen, as well.

So what’s going on?

Related: Why would Saudi Aramco want to buy a stake in Sabic?

Aramco to tap bond market to buy Sabic shares

Bloomberg said Aramco is weighing tapping the international bond market for the first time to finance the acquisition of petrochemical giant Sabic.

“Aramco has already begun seeking billions of dollars in loans from international banks to finance the Sabic deal,” according to people familiar with the matter telling Bloomberg.

“That debt could be lent in three parts, with the first tranche of up to $10 billion likely to be raised this year, these people said.”

The Wall Street Journal said Saudi is pushing a debt-free Aramco to raise tens of billions of dollars in debt, now that the state oil giant’s IPO has stalled, as the kingdom pursues other ways to fund an economic transformation.

VIDEO: Are Aramco’s net H1 2017 revenues enough to spur on IPO interest?

Is the risk too high?

After all, if Aramco goes ahead with an international bond, potentially among the biggest ever done by a corporate issuer, wouldn’t the sale would force the world’s largest oil producer to disclose its accounts to investors as well as many other details about oil reserves and operations?

After all, preparations for an IPO have stalled amid doubts about the company’s and country’s readiness to handle the financial scrutiny that accompanies a public listing of shares.

“A potential deal would give the PIF between $50 billion and $70 billion for all or part of its stake in Sabic,” officials and executives said, according to Bloomberg.

Related: Saudi Aramco has a major ‘Ace in the hole’ to maximize value of its IPO

What’s the point?

Sabic is the country’s largest publicly listed company, with a market capitalization of about $100 billion.

That sum is roughly what the sovereign-wealth fund had expected to get out of Aramco’s IPO plans.

The transaction would supply the PIF with much-needed cash,  to plug a running a budget deficit this year after announcing the biggest fiscal stimulus package in the country’s history.

“Saudi Arabia turned to the international debt markets for the first time two years ago and has since raised at least $40 billion in sovereign debt to fuel spending,” said Bloomberg.

“It is expected to raise more debt this year, increasing its ratio of debt to GDP to 19%. Saudi Arabia has set itself a limit of 30% to clear its fiscal deficit by 2023.”

The PIF needs cash to fund ambitious plans, including building several cities like the $500bn NEOM by the Red Sea and investing in non-oil sectors like mining and tech.

Read: How well is Saudi’s diversification strategy working?

Also, a deal for Sabic would allow Aramco to expand its petrochemical operations and transition the company from a supplier of crude oil to an integrated energy firm, in line with the country’s diversification strategy away from oil.

Bloomberg said the “Aramco-Sabic deal could give Saudi Crown Prince Mohammed bin Salman a shrewd way to avoid an IPO that has proven far more difficult than envisaged, while still raising cash for the sovereign wealth fund.”

“The main difference would be the origin of the cash: rather than equity investors, it would come from bank loans and bond investors.”

Bloomberg says raising cash from bondholders solves another problem: Aramco’s valuation, which would still be muddled.

Valuation has varied from the $2trn originally announced in 2016 to $1 or $1.5 trn as reported by many analysts.

Related: What Aramco IPO? It may never happen, and here’s why

Not avoid, but perhaps delay Aramco listing?

“A proposed reshuffle of state assets would allow Saudi Arabia to delay the listing of Aramco until 2020 or beyond while still spending on economic development projects, according to three sources familiar with the matter telling Reuters.

Reuters broke the news about the proposed SABIC purchase.

“The deal could inject tens of billions of dollars into the PIF, giving it resources to proceed with its plans to create jobs and diversify the economy beyond oil exports,” said Reuters.

“A Sabic deal would allow the government to buy time for the Aramco IPO,” according to industry and international banking sources telling Reuters.

“The Sabic deal would boost Aramco’s valuation giving it access to petrochemicals assets domestically and abroad,” the Reuters sources said.

Read: Houthi targeting Aramco is part of an organized terror campaign

Aramco’s Chief Executive Amin Nasser said recently in an interview with Saudi-owned Al Arabiya TV that the Sabic acquisition was a complex deal and would need a certain timeframe to be completed.

“There is no doubt that the potential acquisition of a strategic stake in Sabic … will delay the IPO,” he said.

Higher oil prices this year have given Riyadh more money to play with, somewhat moderating the need to sell part of Aramco as a way to raise funds when oil prices were low.

Investment bank Jadwa forecasts state oil revenues of $154 billion this year instead of the $131 billion budgeted by Riyadh last December.

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