Saudi Aramco’s bond prospectus has bankers and journalists alike amazed. When the Saudi state-owned oil company’s flotation was first mooted, superlatives flew — even 5% of the company could have been the largest ever IPO, and the fees on such a deal would have made the year of any investment bank that could get a piece of it.
It also held out the tantalising prospect of taking a look beneath the hood of the world’s largest oil company — of figuring out just how profitable the business of hauling fossil fuels out of the ground really is.
The fees attached to Aramco — and to other future Saudi privatisations presumed to be in the pipeline — made every investment bank of consequence sit up and listen. Some sent their CEOs to Saudi to pitch; some set up local subsidiaries, promised to hire locals, committed balance sheet to the region, and bent over backwards to be helpful to the Saudi regime.
This loyalty was sorely tested last autumn, following the dismemberment of journalist Jamal Khashoggi in the Saudi embassy in Istanbul. Business leaders and others pulled out of the Saudi Future Investment Initiative, and international leaders, after a very slow start, also condemned the regime.
For the banks clamouring for Saudi business, this meant walking a very fine line indeed — responding to international outrage with sensitivity, but without offending the regime that handed out the golden mandates. The Aramco IPO might have been cancelled, but the transformation of the Kingdom still promised a range of lucrative opportunities for a bank in the right place.
But the banks don’t have infinite patience, and had already committed vast resources to the Kingdom — in balance sheet, in free advice, in hiring — for almost no real return.
Enter the Aramco bond. For reasons no doubt fathomable to close observers of the House of Saud, Aramco (100% owned by the state) has agreed to buy the 70% stake in chemicals company Sabic owned by the Public Investment Fund (100% owned by the state). One arm of the Saudi state transferring a vast sum of cash to another. The purchase price is to be paid in instalments, but even so, there is financing in place — bank loans, and a $10bn bond.
In strictly economic terms, this makes little sense. If the UK government wished to move, for example, its Royal Bank of Scotland stake from UK Financial Investments to another body, it might hire a bank to give a valuation or a fairness opinion. Under no circumstances would it raise debt from the market to move the position.
And then there are Aramco’s stupendous earnings.
The bond prospectus finally gave the market the look it wanted at Aramco’s financial statements, and the numbers were larger than anyone dared believe. It earned $111bn last year. It has net cash of $22bn. It pays 32% of revenue to the government in royalties and taxes — and the rest of the money as a dividend.
It’s almost impossible to see why the company would need an acquisition package — a month or so of cash would cover the new bond, and the full purchase price, which is staggered until 2022, would be less than nine months of profit. It’s not like the deal has execution risk (uh, no pun intended), nor is it likely that Armco’s cashflows are flighty, seasonal or uncertain. It sells the world’s most essential commodity with the world’s lowest cost of production. Financing streams don’t get more solid than this.
What then, is the point of all this activity? Aramco doesn’t need the money — first because the Saudi state is buying an asset from itself, secondly because even a deal this size is trivially easy for the company to fund from cashflow.
However, it might just make sense as a way to pay those patient bankers. Acquisition loans and bonds come with fees, whether you need the money or not. Getting close to the Kingdom, staying loyal, diligently proffering free advice for years — investment banking is a gift-based economy. Bankers do this because they know, eventually, that clients will look after them. Corporate treasurers know this perfectly well, and spend plenty of time figuring out how to dish out “wallet” to the banks which have given them subsidised loans for years.
A bond mandate might be a poor prize compared to the world’s biggest IPO, but it’s just possible Aramco has figured out the same thing.