Aramco’s Sabic Deal Should Be A Warning To Saudi Investors
On Wednesday, March 27, the Saudi national oil company, Saudi Aramco, announced that it had reached an agreement to acquire the Saudi petrochemicals company, SABIC, for $69.1 billion. It is being touted as an achievement and possibly a step toward a long-expected initial public offering of Aramco, but it should be seen as an ominous sign by investors looking at Saudi opportunities.
The announcement made clear that Aramco purchased only the 70% of SABIC that was owned by The Saudi Public Investment Fund (PIF)—the government’s sovereign wealth fund. The remaining 30% is publicly traded and will remain listed on Tadawul, the Saudi stock exchange. The details of the deal have drawn little scrutiny or discussion about their impact on the overall investment scene in the kingdom. When examined, the message to investors is not a positive one.
When the PIF and the government are involved, they will get the best of any deal, and its investment partners will not. Rumors about an upcoming purchase of SABIC by Aramco began in July of 2018, but there was no official news of the progression of the deal until March 27. At that point, the deal was just announced. Owners of SABIC equities—whether they are banks, institutional investors or retail investors—had no say in the deal. They did not even know about it. There was no discussion at a shareholder meeting, no vote, no public board meeting. Shareholders (other than the PIF) were not given the opportunity to sell their own shares or to advocate for a higher sale price. As it turns out, the purchase price was SAR 123.40, slightly below the price of SAR 124.20 at close of trading on the 27th.
The big problem is that the PIF and the government own interests in many of the popular businesses in Saudi Arabia. The PIF portfolio (some of which can be found here) contains about 10% of the 200 or so companies listed on Tadawul. However, it has been reported that the intermingling between the two bodies may be even more significant. Reportedly, the PIF invests in Tadawul equities after bad news in an attempt to prop up the Saudi market. Moreover, the PIF actually owns Tadawul itself. When or if the PIF wishes to engage in any type of deal involving one of these companies, the other shareholders will likely be left out and left ignorant, just as they were in the SABIC deal.
This is not only true for publicly traded Saudi firms. The PIF is involved in ever more areas of the Saudi economy, even owning Neom, the planned industrial and futuristic city intended to be built over a giant swath of land and sea in the kingdom’s northwest corner. The PIF is even buying up desirable land in the kingdom, squeezing out private enterprise. The PIF can be an enticing partner, as it was when AMC Entertainment Holdings entered the new Saudi cinema market with PIF financial backing. However, investors need to know what they are getting into.
The PIF is the investment arm of the crown prince, meaning it has the power of the king behind it. Saudi Arabia is ruled by an absolute monarch, meaning if the king or his son, the crown prince, want something, they can get it. When a company partners with the PIF in a new enterprise (like AMC), the company is, to some extent, at the whims of the PIF. When an entrepreneur seeks to compete with PIF plans (perhaps by placing a bid for prime land), there is no way to win. When an investor buys equities on Tadawul, the investor must realize that the PIF may change the scenario without warning or input from others. The truth is you can’t negotiate against a king and you can’t compete with the government.