More than merge to survive
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’