Oil giant Saudi Aramco completes $70bn takeover of SABIC

Saudi Aramco has negotiated more time to pay for an almost-$70bn acquisition of Saudi Basic Industries Corp. (SABIC) as this year’s slump in oil prices stretches its finances.

Aramco announced new terms on Wednesday as it completed the purchase of a 70 per cent stake in SABIC from Saudi Arabia’s sovereign wealth fund.

Aramco will push back the bulk of installments until after 2022 and delay the final one by three years until 2028.

The oil producer will make its first payment of $7bn to the Public Investment Fund on August 2, Aramco said in a statement to the stock exchange in Riyadh. Under the previous deal reached in October — when crude was at about $60 a barrel — Aramco would have had to pay $25bn by the end of this month.

Charges on a loan the PIF is providing Aramco for the acquisition now total $5.9bn, up from $2.5bn previously.

The new terms are “positive for Aramco’s balance sheet and help it withstand weaker macro conditions for even longer,” Biraj Borkhataria, head of energy research at Royal Bank of Canada’s European arm, said in a note to clients.

Brent crude has more than doubled since late April as more economies re-open from coronavirus lockdowns. But at around $41 a barrel, it’s still down 37 per cent this year, putting huge pressure on producers globally.

Conserving cash on the SABIC takeover this year will help Aramco fulfill its aim of paying a $75bn dividend to shareholders.

The deal effectively transfers cash from one arm of the Saudi state to another. It enables Aramco to accelerate its push to turn oil into products such as plastics, while giving the PIF more cash to increase its burgeoning investments inside Saudi Arabia and abroad, including in US stocks.

Aramco, the world’s biggest oil exporter, agreed in March last year to pay SAR123.4 ($32.90) a share for the PIF’s stake in SABIC, the equivalent of $69.1bn. The rest of the chemicals maker will remain listed on the Saudi stock exchange, where a small sliver of Aramco also trades. That will prevent Aramco from being able to fully integrate SABIC.

Since the deal was announced, SABIC’s stock has dropped to less than SAR90. The transaction serves as a way for the PIF to get a significant cash injection, since the proceeds it was counting on receiving from Aramco’s initial public offering in December fell short of expectations.

Crown Prince Mohammed Bin Salman had expected the share sale to value Aramco at $2 trillion and perhaps raise as much as $100bn from global investors. After they balked at the Prince’s numbers, Aramco settled on a smaller domestic offering, which raised about $30bn, still the largest IPO ever.

The sovereign wealth fund, under the leadership of Yasir Al-Rumayyan, who’s also Aramco’s chairman, is shifting its investment focus.

Five years ago it was a holding company for government stakes in the likes of SABIC and National Commercial Bank. After an aggressive period of deal-making, it now holds shares in Citigroup, Facebook and Uber Technologies, and is one of the major investors in SoftBank’s Vision Fund.

The PIF lies at the heart of Saudi Arabia’s economic transformation plan known as Vision 2030, which aims to reduce its reliance on oil. The fund is meant to be an anchor investor in domestic projects like the $500bn futuristic city of Neom, which Prince Mohammed wants to develop on the kingdom’s northwestern coast.

Management Changes
The SABIC deal “accelerates Aramco’s downstream strategy and transforms our company into one of the major global petrochemicals players,” Aramco chief executive officer Amin Nasser said in a statement.

Aramco has appointed its senior vice president for finance, strategy and development, Khalid Al Dabbagh, as SABIC’s chairman. It also added Ziad Thamer Al Murshed, vice president of international operations, and Oliver Gerard Thorel, vice president of chemicals, to the SABIC board.

Rashid Sharif, head of the local investments division at PIF, and Roberto Gualdoni have resigned from SABIC’s board.

The integration could give a needed boost to Aramco’s downstream unit and SABIC, both of which lost money in the first quarter of the year. Aramco’s downstream business swung to a $5.1bn loss before interest and taxes, according to its latest earnings statement.

SABIC announced on Wednesday that it was cutting its dividend as it grapples with a slump in chemicals demand that pushed it into a first-quarter loss of $250m and prompted it to announce that it was suspending new capital expenditure.