$ 69 billion mega-deal endangered due to price war

US, WASHINGTON (ORDO NEWS) — Even before the recent announcement of an agreement by Saudi leading oil and gas company Saudi Aramco to acquire a 70% stake in Saudi Basic Industries Corporation’s key petrochemical company (SABIC) for $ 69.1 billion from the Saudi sovereign wealth fund, PIF, the deal was similar more on a meaningless trick in an attempt to transfer money from one Saudi balance to another. It looked like that, that’s why it is… and even worse.

Aramco CEO Amin Nasser often emphasized that he sees the company not only as an oil producer, but also as a developer of high-tech petrochemical products with high added value.

However, the acquisition by Aramco of a controlling stake in SABIC involves a huge increase in resources – people, offices, equipment, research and development, marketing and capital. In addition, the combination of SABIC senior and mid-level management with Aramco’s management, with its outdated state bureaucratic machine, will negatively impact SABIC’s operational efficiency and revenue.

And the history of Aramco confirms this. In 2008, an IPO of its own petrochemical and oil refining unit, Rabigh Refining and Petrochemical Company (PetroRabigh), was carried out. Initially, it was planned to introduce Petro Rabigh as a strong company, in which real professionals in their field work. However, the real picture of what was happening became clear from the texts of long applications, which, by law, must be present in the IPO document.

Potential investors have been warned that Petro Rabigh has “significant long-term borrowing,” so much more is needed to fund future expansion plans. After the IPO, fires occurred at the main enterprise, power outages began, and debts increased. The stock price collapsed, losing about 80% of the funds invested in shares in the first year. The transaction was unprofitable for 10 years.

So what is the point of such a deal? Of course, not to attract much-needed funds for the troubled budget of Saudi Arabia.

“The state-owned company Aramco is buying a stake in the state-owned company SABIC from the state sovereign fund PIF,” said a senior hedge fund manager in New York.

“Foreign money was supposed to come to the kingdom as payment for a 5% stake in Saudi Aramco. However, it was not possible to sell it abroad, since it became clear that the funds from the IPO would go towards financing the grandiose plan of bin Salman Vision-2030, designed to diversify the economy of the kingdom and to save her from dependence on oil. So in fact it is Saudi money that is already used in his sovereign fund, “he added.

Even if Aramco offered to buy a 30% stake in SABIC, it could be argued that at least Saudi Arabia was attracting new money to its sovereign treasury. But this is not so. This transaction would be disruptive to SABIC’s balance sheets, since earlier Aramco announced its intention to issue bonds secured by the SABIC balance sheet and attached to the name SABIC. This would essentially force SABIC to pay for the purchase of Aramco.

Thus, the actual meaning of the deal is to allow bin Salman to save face. Before bin Salman dragged Saudi Arabia into a second catastrophic price war with American shale oil in 10 years, the Aramco-SABIC “deal” was supposed to provide PIF with money for various projects related to Vision-2030, including the construction of a futuristic city in remote corner of the saudi desert. It should also have been used to create “added value” to the Aramco IPO, until one of the leaders of the IPO advisory group, who holds investment and banking positions in the USA, realized that this deal would make the already unattractive Aramco even worse.

And now, thanks to this deal, bin Salman was caught between a rock and a hard place. On the one hand, this deal was loudly announced publicly, so now you can’t refuse it, otherwise bin Salman will lose his face. The Central Bank of Saudi Arabia has depleted its net foreign assets at the fastest pace since 2000, which has called into question the stability of the most important economic link of the Saudi rial to the dollar. At the same time, in the first quarter, the kingdom’s budget deficit amounted to $ 9 billion. A number of independent analysts predict that GDP may decrease by 3% this year, the budget deficit may increase to 15% of production.

On the other hand, there’s even less sense in the deal now than before, since the deal will not result in new private financing that is not on the balance sheet of Saudi Arabia. Therefore, bin Salman now lives in illusions. And, considering that everyone involved in the transaction works in the fantasy world, the purpose of the transaction, which was not a transaction, is to pricing the transaction (for which there is no real price, since the transaction has never been a transaction).

Aramco wants to pay less for SABIC than agreed, as the cost of SABIC fell by more than 40% due to the impact of the coronavirus pandemic. This is only partly true. The real reason SABIC’s value plummeted is because bin Salman decided to start a price war at the same time that coronavirus was already destroying demand, leading to a drop in oil prices.

In any case, SABIC shares are trading at 70 riyals compared to 123.39 riyals, which was established by the original agreement. The company suffered a second quarterly loss in the first quarter. The total market value of SABIC is about $ 56.5 billion; the value of Aramco’s planned stake is about $ 40 billion, not the $ 69.1 billion originally agreed. Overall, Aramco wants to pay less, but since it only pays for the share that is transferred from one hand to the Saudi government to the other, the deal is meaningless.

This implies the following: bin Salman must continue to pretend to the people and, more importantly, to the elders, who can remove him at a time when the focus is on the inheritance of the throne of the sick king Salman, that money comes from Saudi Arabia from the outside. The fact that this is only a ploy will not be understood by most Saudi residents. Bin Salman may be able to convince some senior Saudis who are closest to him that the money flowing into the PIF can be seen by hostile elders as “external funding” that can be redirected to implement Vision 2030.

“It is very important that bin Salman gain time, as many high-ranking Saudi residents are unhappy with his swift rise to power. These sentiments were aggravated by alleged anti-corruption purges at the end of 2017, as well as at the time he was targeting the two most influential members of the royal family, princes Ahmed bin Abdul Aziz and Mohammed bin Nayef, “a senior source close to the Saudi government said.

“Many of these high-ranking disaffected Saudis are waiting for how far the Americans will go to withdraw their support for him personally,” he concluded.

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