Saudi Aramco is in early talks to restructure its deal to acquire a 70% stake in Sabic and to reduce the price tag following a more than 40% drop in the Sabic share price due to the coronavirus disease 2019 (COVID-19) pandemic, according to reports on Reuters and Bloomberg.
Bloomberg further reports that Aramco is also seeking to delay payments to the Public Investment Fund (PIF; Riyadh) beyond the current agreed schedule. The two sides have already agreed to stagger the payments once. Under a deal signed in October, Aramco agreed to pay a third of the deal in cash, down from half originally. The deadline for paying the rest was extended by four years until September 2025. Aramco’s chairman, Yasir al-Rumayyan, who is also head of the PIF, is leading the talks for Aramco, according to Reuters.
Aramco agreed in March 2019 to buy a majority stake in Sabic from the PIF, a sovereign wealth fund, for $69.1 billion, in one of the biggest deals in the global chemical industry. The transaction was priced at 123.39 Saudi riyals ($32.86) per Sabic share, but shares in Sabic have collapsed in the wake of the COVID-19 outbreak and are currently trading at only SR73 on the Tadawul stock exchange. Sabic recently reported a first-quarter net loss of SR950 million, compared with a net profit of SR3.41 billion in the year-earlier quarter and a net loss of SR790 million in the final quarter of 2019. Sabic’s market capitalization is now about $59.1 billion, which makes Aramco’s planned 70% stake worth only $41.4 billion.
Analysts say the latest maneuverings should be seen in the context of Saudi Arabia’s efforts to shore up its budget following the collapse in the oil price. The country is thought to need a price of just under $84/bbl to balance its income and outgoings. Aramco’s pledge to pay $75 billion in dividends this year is important in this respect as the kingdom still owns 98.3% of Aramco shares. But Aramco, according to analysts quoted anonymously on Reuters, does not have the free cash flow to pay the dividend and is trying to reduce its cash outflow. Reducing the payment from one arm of the Saudi state, Aramco, to another, the PIF, might appear nugatory but it would have the effect of supporting current income at the expense of future expenditure on Crown Prince Mohammed bin Salman’s Vision 2030 program. The PIF, a key player in this strategy, is tasked with long-term investment in projects at home and abroad to diversify the economy away from oil.
In this context, the Saudi Minister of Finance and Acting Minister of Economy and Planning Mohammad Aljadaan, today announced a series of measures to protect the economy and save around SR100 billion. They include suspending the government cost-of-living allowance, tripling value-added tax to 15%, and postponing or reducing some state capital expenditure and Vision 2030 spending plans.
Analysts say that it is also important to establish Aramco as a dependable and investable partner in case the kingdom is forced in future to sell more Aramco shares, or issue more bonds in Aramco’s name. In seeking to reduce the cost of the Sabic deal, they note, Aramco is also behaving as a normal public company in similar circumstances, although it is not clear whether the agreement with the PIF contains a major adverse change (MAC) provision.
PIF is also looking to extend a $10-billion bridge loan signed with 10 banks in October and linked to the acquisition by Aramco of its stake in Sabic, Reuters adds. The loan aims to provide PIF with short-term funding for new investments and would have been repaid after the sale of Sabic is completed, the PIF said last year.
Sabic CEO Yousef al-Benyan told a news briefing last week that Aramco has committed to complete the acquisition of a controlling stake in Sabic by the second quarter and he did not see anything that changes this timeline. Some 30% of Sabic shares will continue to be traded on the Tadawul stock exchange. Sabic says that any change in the agreement is purely a matter between Aramco and PIF. Aramco and PIF both declined to comment on the reports.
By: Natasha Alperowicz
Source: Chemical Week
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