More than merge to sur­vive

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they will need to do the same. Day be­lieves the fun­da­men­tal flaw is their in­abil­ity to keep pace with the way that the rest of con­sumer-fac­ing in­dus­tries have moved. There’s no rea­son to ex­pect that a merger of two “clunky old com­pa­nies” will nec­es­sar­ily re­sult in some­thing new, he says. “They are al­ready gi­ants rel­a­tive to the min­nows of the sec­tor and they are fail­ing to in­no­vate so it doesn’t fol­low that in­no­va­tion is Cot­tam power sta­tion, owned by EDF, one of the Big Six sup­pli­ers. Innogy boss Peter Terium said the trans­for­ma­tion of the en­ergy sup­ply sec­tor is a game less about gas and power than dig­i­tal tools and data in­evitable once they merge,” he rea­sons. Other in­dus­try crit­ics add that two wrongs don’t make a right.

Ed Kamm, an ex­ec­u­tive at en­ergy min­now First Util­ity, con­demned the merger as a mar­riage of con­ve­nience say­ing the deal “smacks of two di­nosaurs com­ing to­gether to sur­vive” and at the ex­pense of their cus­tomers.

Alex Neill, of con­sumer group Which?, har­bours sim­i­lar fears. He warns that “merg­ers of such big play­ers in es­sen­tial mar­kets, such as en­ergy, are rarely a good thing for con­sumers”. This is es­pe­cially true as both lan­guish in the bot­tom half of the group’s cus­tomer sat­is­fac­tion sur­vey, he says. They are not alone in call­ing for the Com­pe­ti­tion and Mar­kets Au­thor­ity to con­duct a thor­ough au­dit of the pro­posal. The in­tense po­lit­i­cal pres­sure that has­tened the dou­ble-exit may yet scup­per the plans en­tirely if reg­u­la­tors agree it di­min­ishes com­pe­ti­tion in the mar­ket.

But it’s a bat­tle the pair are al­ready well pre­pared to fight. SSE submitted the plans for a new £3bn en­ergy gi­ant to the CMA within hours of re­veal­ing them to in­vestors last week, in a bid to speed along the process, which is ex­pected to take at least a year.

Terium says the com­plex is­sue of fair com­pe­ti­tion is never as sim­ple as the num­ber of sup­pli­ers in the mar­ket. The Big Six may shrink to the Big Five but their mar­ket con­cen­tra­tion will still be below 25pc – a key fac­tor marker for the CMA, but not the only one. This is far from a done deal.

The pair will push for­ward re­gard­less in a race to beat the en­ergy price cap’s jour­ney through Par­lia­ment and into the mar­ket, which is ex­pected by early 2019. In or­der to list the new com­pany on the Lon­don Stock Ex­change in a lit­tle over 12 months, SSE said it has al­ready be­gun carv­ing the sup­plier out of the main group in the mean­time. By next sum­mer it hopes to win the ap­proval of its share­hold­ers, and the mar­ket.

“We wouldn’t be do­ing this if we didn’t think it would work,” says Terium. Or per­haps, if they didn’t think they had any other choice. amongst the roy­als cur­rently be­ing in­ves­ti­gated. His ar­rest is per­haps the most sur­pris­ing of all. The prince – fa­mous for his ob­ses­sion with fi­nan­cial mar­kets and Twit­ter – posed no threat to the po­lit­i­cal es­tab­lish­ment. Shares in his King­dom Hold­ings in­vest­ment com­pany plum­meted 10pc im­me­di­ately af­ter the ar­rests be­came pub­lic. Calls and mes­sages sent to his ad­vis­ers for com­ment weren’t re­turned.

“The busi­ness com­mu­nity will not like the un­cer­tainty be­ing caused around the suc­ces­sion and the sur­pris­ing na­ture of the ar­rests,” said Ti­mothy Grey, who was chief ex­ec­u­tive of HSBC Saudi Ara­bia for al­most a decade. “But any way you cut it Saudi Ara­bia is still a monar­chy and from an in­vestor’s point of view it’s prob­a­bly not con­cern­ing.”

MBS has time to steady the ship. The first ma­jor test of con­fi­dence in the new Saudi Ara­bia be­ing shaped will come in its plan to sell a stake in state oil driller Aramco. The world’s largest sin­gle pro­ducer of crude is big­ger than Exxon Mo­bil, Royal Dutch Shell and BP com­bined. How­ever, its plans to list a 5pc stake in the com­pany by the end of 2018 on an in­ter­na­tional stock ex­change such as Lon­don or New York have met with a cool re­sponse. The ini­tial pub­lic of­fer­ing – which is ex­pected to value the com­pany at $2tril­lion – is the brain­child of Mohammed bin Sal­man and a cen­tral pil­lar of his scheme to di­ver­sify the king­dom’s econ­omy.

How­ever, prepa­ra­tions for the float have been mired in con­tro­versy. Achiev­ing a val­u­a­tion that would bring in around $100bn from the sale is also un­likely while oil prices re­main rooted below $70 per bar­rel. In­stead of an in­ter­na­tional list­ing the com­pany’s shares could be sold ini­tially on the lo­cal Tadawul stock ex­change, or a stake could be off­loaded in a pri­vate place­ment to ei­ther a sov­er­eign wealth fund or a Chi­nese part­ner. How­ever, both op­tions would look like a fail­ure for MBS per­son­ally and the king­dom, which could be forced to sell off its crown jewel piece­meal. The de­ten­tion of Aramco board mem­ber Ibrahim Al-as­saf in the graft in­quiry also raises con­cerns over the IPO and the chal­lenge fac­ing in­vestors to con­duct due dili­gence. Aramco’s ad­vis­ers de­clined to com­ment.

The Aramco float is vi­tal to a wider plan known as Vi­sion 2030, which calls for in­creas­ing non-oil rev­enues to 1 tril­lion riyals ($267bn) by the end of the next decade, up from 163.5bn riyals Prince Al­waleed bin Talal, busi­ness­man, in­vestor and phi­lan­thropist, and mem­ber of the Saudi royal fam­ily, on hol­i­day with his son and daugh­ter on his yacht. He is among those ar­rested in the cor­rup­tion crack­down in 2015. An­other aim is to pump $500bn into build­ing a new eco­nomic city known as NEOM along its Red Sea coast. The fu­tur­is­tic me­trop­o­lis will be pow­ered by so­lar en­ergy and partly pop­u­lated by ro­bots. Iron­i­cally, the project was un­veiled in a lav­ish in­ter­na­tional in­vest­ment fo­rum held last month in the same ho­tel where the Al-saud roy­als ac­cused of cor­rup­tion are all cur­rently be­ing de­tained.

“Eco­nomic cities are no panacea for Saudi Ara­bia. Sell­ing the stake in Aramco will give them some cash to di­ver­sify but Saudi Ara­bia will still be an econ­omy de­pen­dent on oil, gas and petro­chem­i­cals for some time,” said Grey.

The big­gest im­me­di­ate im­pact of the up­heaval in Saudi Ara­bia and the con­sol­i­da­tion of power un­der MBS could be on long-term oil prices and pol­icy. The prince has sig­nalled his wish to see the Or­gan­i­sa­tion of the Petroleum Ex­port­ing Coun­tries (OPEC) ex­tend its agree­ment with Rus­sia and other ma­jor pro­duc­ers to limit out­put by 1.8m b/d. That deal has helped push crude prices closer to the $70 per bar­rel fig­ure that Saudi Ara­bia re­quires to balance its bud­get and pur­sue its ex­pen­sive proxy-war against Iran and its Houthi rebels in the moun­tains of Ye­men. Oil ex­ports still ac­count for three quar­ters of the king­dom’s ex­port rev­enues.

“Above $60 per bar­rel Brent pro­vides a much bet­ter en­abling en­vi­ron­ment for many of the MBS key vi­sion 2030 ini­tia­tives,” said He­lima Croft, head of com­mod­ity strat­egy at RBC Cap­i­tal Mar­kets in New York. “Given all the in­ter­nal is­sues at the mo­ment, I don’t think he has ap­petite for an­other oil price down­turn.

“I think the in­ter­est­ing ques­tion is what would he do if the in­creased re­gional ten­sions in light of Le­banon pro­pel Brent past $70. Would he opt to cap the up­side to pre­vent a full scale US shale re­vival or savour the ad­di­tional rev­enue.”

Those higher prices will also be crucial to solv­ing some of the king­dom’s press­ing eco­nomic prob­lems. Plans to cut un­em­ploy­ment to around 7pc, from 12pc at present will re­quire more fund­ing and pro­vide more op­por­tu­ni­ties for women to par­tic­i­pate in the work­place.

“I’ve felt a mix­ture of anx­i­ety and ex­cite­ment in Saudi es­pe­cially amongst younger peo­ple over what is hap­pen­ing,” said Front­line’s Kroh­ley. An­drew Critchlow is head of en­ergy news, EMEA, at S&P Global Platts.

The mar­ket is trans­form­ing. De­vel­op­ing a dig­i­tally based prod­uct re­quires two things: scale and skill

‘I’ve felt a mix­ture of anx­i­ety and ex­cite­ment es­pe­cially amongst younger peo­ple over what is hap­pen­ing’

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