COMPANIES OVERVIEW
Saudi Aramco
Saudi Arabia’s Aramco ranks as a global magnate in the oil industry. In 2018, the energy giant listed as the world’s most profitable company, recording a net income of $111.1bn, running far ahead of other oil companies such as Royal Dutch Shell ($23.9bn) and Exxon Mobil ($20.8bn).
The company was founded in 1933 through a concession agreement between Saudi Arabia and the Standard Oil Company of California (SOCAL) that created the subsidiary Californian Arabian Standard Oil Company (CASOC) that later became the Saudi Arabian Oil Company.
It has been estimated that Saudi Aramco, present in Asia, Europe and the Americas with its subsidiaries has a valuation of roughly $2 trillion.
Milestones in the company’s success include the world’s longest pipeline, the 1.212km Trans-Arabian Pipeline (Tapline) and the discovery of the Sadaniyah field in 1951, the world’s biggest offshore oil field. In 1973, the Saudi government acquired a 25% stake in the company, that was increased to 60% in 1974 and ten years later to the entire stake of 100%.
In the late 1980s, Aramco then transformed from an exclusive oil-producing and exporting corporation to an integrated petroleum venture.
Towards the millennium, Aramco advanced more technological approaches; the development of a simulator for potential performance of oil fields, POWERS (Parallel Oil-Water-Gas-Reservoir Simulator) is one of them. With the establishment of its own Research and Development Center in 2000, Aramco continues to develop breakthrough knowledge to increase energy efficiency and allocate untapped resources.
While its strong rating of A- reflects Aramco’s profitability and success, Western oil companies are valued at a higher rating, which is due to the company’s dependency upon Saudi Arabia. If political climate changed, this could negatively impact Aramco’s net worth, rating agencies fear.
SABIC
Founded by the Saudi government in 1976 and headquartered in Riyadh, the Saudi Basic Industries Corp. (SABIC) uses secondary-products of oil extraction as profitable resource for the production and export of beneficial assets such as chemicals, polymers and fertilizers.
In the past 40 years, the petrochemical manufacturer has increased total production from 6.3 million metric tons in 1976 to 70.4million metric tons in 2015. Currently, it operates 62 plants and research centers across the Middle East, Europe, USA, South East Asia and North East Asia.
Likewise, it owns more than 12.191 global patents and launches around 150 new products annually. The Saudi government holds a 70% stake in the company while the other 30% are owned by private investors in the Gulf Cooperation Council (GCC) countries. Strategic Business Units include petrochemicals (polymers, chemicals), metals, agri-nutrients and specialties.
Through various M&A deals in the petrochemical industry, such as the acquisition of DSM’s petrochemical line in Europe in 2002 and the British firm Huntsman Petrochemicals in 2006, SABIC has added considerable dimensions to its presence in Europe over the years which would benefit both Aramco and SABIC in a takeover.
INDUSTRY OVERVIEW
Saudi Aramco is one of the biggest exponents of the oil industry, which is also known as petroleum industry or oil patch.
On the other hand, SABIC is one of the world’s leading companies in the chemical sector, and its products comprehend industrial polymers, fertilizers and metals.
Oil industry is a particular industry since it is in its nature to face a future problem: the lack of the prime material at a certain point in the future. This has led to innovation in the industry, in the field of exploration and new methods to make the process more efficient.
The biggest change has been the one of fracking, which consists of two components.
The key element is hydraulic fracturing: fluid is pumped into the earth at a high enough pressure to crack rocks from which to extract oil. This particular kind of rock is called hydrocarbon-bearing rock. This new industry’s technology has had a disruptive impact on other economies as well: in 2006 USA imported 60% of its oil, whereas now is the number one producer in the world.
Obviously, this breakthrough did not have a positive impact on the Saudi Arabia’s oil industry.
Another important factor is the computation power which can be deployed in order to analyze data for exploration, drilling and simulation. Aramco has always been at the top spot in this category.
The price of oil has taken a big hit since 2014 as shown by the graph, although it’s currently above the minimum.
The days where the price was able to go over the $200 barrier are gone. However, some analysts now argue that due to the now lower investments in exploration price could surge once again, with the possibility of passing the $100 barrier in 2019.
In the long run the increase in urban population in Asia will be a major driver, not only counting the increase in automotive demand but for plastic goods as well.
SABIC is a major operator in the chemical sector, with a range of products in polymers, chemicals, agri-nutrients, metals and specialties.
Particularly sensible in the long period seems to be the agri-nutrients sector. Global population is expected to be 9.8 billion in 2050 and this will provide the food industry one of the biggest challenges it has ever faced.
The products from Sabic are used in a variety of industries and one of them is the automotive, including crash and chassis expertise. The safety standards have witnessed a big change in the past years and electric vehicles will pose new challenges.
Within the industry which SABIC calls “building and construction” there is one key area which is going to be more crucial the more we look at the future: water management. SABIC offers solutions in four different areas: water distribution, treatment, measurement and storage.
The industry with fastest development in which SABIC is involved is the tech one, with products for electronic devices and display, electronic components and infrastructure, and lighting.
With the ever in demand sector of smartphones, tablets and notebook one can comprehend the importance of this strategic division. For example, SABIC has a sub section dedicated to wireless solutions, an evolving sector with the new 5g connection expected to become a standard by 2020.
DEAL STRUCTURE
On the 27th of March, Aramco has agreed to buy a 70 percent stake in SABIC (Saudi Basic Industries Corp) from the PIF (public investment fund), the kingdom’s wealth fund for $69.1 billion.
The agreed purchase price per share was 123.39 riyals ($32,89), a slight discount from SABIC’s closing price on the day before the announcement of the acquisition. According to analysts, the price payed is fair given that the acquisition has the nature of a long-term investment and that SABIC growth is mainly related to population growth.
Aramco intends to pay the 50% of the acquisition price right after the closing of the SABIC deal, while the remainder will be paid over a two-year period using the huge cash reserves ($22 billion) of the company and other sources which have not been specified.
The acquisition will be funded using both cash reserves and the bond recently issued by the company.
Aramco will raise $12 billion (2 billion more than what originally planned) with the sale of its first bond. The market showed great interest in this IDO, with Aramco receiving more than $100 billion in orders.
The bond sale has attracted US fund managers not only due to the chance to invest in Aramco but also because after opening its books Aramco resulted to be the most profitable company in the world. Rating agencies didn’t give Aramco the top-notch class (Aaa) but a lower one A+ reflecting the kingdom’s own rating level.
DEAL DRIVERS
The drivers of the deal between Saudi Aramco and SABIC are mainly related to two different factors.
The first one is represented by the fact that Aramco is planning to become a world energy leader and not just the 1st world oil producer, so it’s expanding its downstream business through acquisitions, international investments and capex financing.
It has invested around $35 billion in projects last year including the construction of its gas plant.
SABIC represents the mean to unlock the growth opportunity of Aramco not just in Saudi Arabia but all over the world meeting the rising demand for energy and chemicals products.
The long-term strategy of Aramco consists in increasing the global refining capacity from 4.9 million to 8-10 million barrels per day by 2030 of which 2-3 million barrels per day will be converted into petrochemical products.
The second one is represented by the need of Saudi Arabia’s Crown Prince Mohammed bin Salman to fund the PIF, the kingdom’s wealth fund, and realize its Vision 2030 plan to diversify the kingdom’s economy. The injection of cash gives the PIF the power to proceed with its plans to create jobs and diversify the Arab economy beyond oil exports.
Advisors
JPMorgan and Morgan Stanley were picked to advise Aramco on the SABIC acquisition. Bank of America Merrill Lynch, Goldman Sachs and Michael Klein are acting as the advisors for PIF on the sale of its stake, while Citigroup advised SABIC.
Sources and References: Companies Website, NY Times, Financial Times, Business Insider, The Guardian, Borsa Inside, Thomson Reuters Eikon, Bloomberg, Vision 2030, Forbes.
To contact the authors:
Giuseppe Tricarico giuseppe.tricarico@studbocconi.it
Elise Zender elise.zender@studbocconi.it
Davide Martintoni davide.martintoni@studbocconi.it
Giorgi Mdivnishvili giorgi.mdivnishvili@studbocconi.it
Bocconi Students M&A Circle 
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