13th November 2019
Welcome to this week’s Commercial News Update!
Topics covered this week are:
1. Saudi Aramco IPO Update (@Sairah)
2. Google’s Acquisition of Fitbit (@Moni)
3. Moody’s Lowers UK Credit Outlook (@ELA)
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1. Saudi Aramco IPO Update (@Sairah)
The Story:
Last week, Saudi Aramco published its 600-page prospectus about its planned stock market flotation, providing potential shareholders a new outlook before the IPO. The prospectus outlined a number of key risks, including the government’s control over oil output, armed conflicts and climate change. It is known that the oil industry is the largest contributor to Saudi Arabia’s economy and accounts for 63% of the government’s income. This means any major implications concerning the business could cause a hindrance on the nation’s GDP, cash revenues and also trade policies.
However, the document did not mention any specifics about the valuation of Aramco, the date of the listing nor how much of the Saudi firm will be sold. Although, the prospectus did state up to 0.5% of the company’s shares would be set aside for retail (individual) investors.
The percentage of larger institutional investors, which could include oil companies from Russia, China and other countries, will be determined by whether Prince Mohammed bin Salman and his advisers can strike deals with them. The Saudi Prince has also considered that Aramco’s stock would trade on international exchanges such as New York or London, which could be another approach to attract institutional investors. But, analysts question whether this will even occur in the future.
Impact on Businesses and Law Firms:
Analysts have predicted Aramco’s support from investors will be a difficult one. This is because of a number of factors, such as low demand in crude oil and global economic growth currently weakening due to tensions with Brexit and the US-China trade war. Also, climate crisis fears are on the rise, recent global protests have increased public scrutiny of oil producers, and Aramco’s large footprint in the industry leaves it extremely vulnerable.
Institutional investors are also under enormous pressure to dump oil assets, primarily because of two concerns – the impact the greenhouse gas emissions generate and a decline in performance as more countries are seeking to shift to renewable sources of energy. For example, Norway’s wealth fund emphasises it will phase out oil and gas stocks by the end of this year, and if it does so successfully, many other countries will follow suit. Most recently, major oil companies, including Aramco, have committed to projects that do not align with the Paris Climate Agreement, which aims to limit the increase in global average temperatures to 1.5 degrees Celsius. If, after its IPO, Aramco does pursue projects that exceeds the measures outlined within the Paris Agreement (which shift away from hydrocarbon-based fuels), Aramco could incur extreme costs or will have to invest additional capital, a potential deterrence for new investors.
If investors do invest, another concern will be the extent to which their interests in Aramco will be protected. With only a small percentage of the company’s shares likely to be publicly traded, the Saudi government will remain the largest shareholder, and therefore can largely do as it wishes. To consider their rights, investors will need the assistance of law firms who hold a large presence in the Middle East, such as White & Case and DLA Piper, to advise them on the legal framework of Saudi Arabia. Also, before investors are protected, the Saudi Arabian General Investment Authority (SAGIA) will need to approve the investor (if international). So, corporate lawyers will be needed to guide investors throughout the investment approval. SAGIA investment licenses have different restrictions and requirements, including shareholding percentages, investor experience, and capital contributions. Therefore, lawyers will be required to play a heavy role in advising investors on whether investing in Aramco will be a beneficial.
2. Google’s Acquisition of Fitbit (@Moni)
The Story
Last week Google announced that it had struck a deal to buy fitness tracking company Fitbit, for $2.1bn. The acquisition will improve Google’s health and wellness offerings as the two team up to take on Apple whose wearable tech business has grown significantly in the past several years. Although the deal is a great strategic move for both companies, it is subject to shareholder and regulatory approval, which could prove to be a challenge.
Impact on Businesses and Law Firms
Google’s move comes at an interesting time, given that regulators in the US and Europe are focused on reigning in anti-competitive behaviour, data concentration and privacy abuses by big tech companies, and the Fitbit acquisition appears to have all of those characteristics.
The proposed deal is Google’s biggest acquisition in consumer electronics since it paid $3.2bn for Nest in 2014, and could potentially run into hurdles with antitrust authorities. In addition to potential antitrust concerns, Fitbit owners have expressed concerns about Google owning personal health data as well as location information. Following the announcement, Fitbit promised that user data will not be used for Google ads and customers will be able to ‘review, move or delete their data’.
Google is itself aware of the potential for regulatory intervention and agreed to pay Fitbit a $250m termination fee if it fails to obtain antitrust approval for the deal. Lawyers and other tech companies will be watching closely to see how regulators approach the deal as it will certainly test their commitments to preventing tech companies from consolidating their control over industries and user data.
3. Moody’s Lowers UK Credit Outlook (@ELA)
The Story
Credit rating agency Moody’s has changed its outlook on the current UK credit rating of AA2, from ‘stable’ to ‘negative’ – a sign that the country’s credit rating may be downgraded in the near future.
As a justification, Moody’s noted that ‘the increasing inertia and, at times, paralysis that has characterised the Brexit-era policymaking process has illustrated how the capability and predictability that has traditionally distinguished the UK’s institutionalised framework has diminished.’
Impact on Businesses and Law Firms
The UK’s current AA2 rating (the same as France and South Korea, for reference) is two levels below the top grade, currently assigned to Germany and the US. The UK lost its top AAA rating in 2013, before being downgraded again in 2017. But why does this matter?
Credit rating agencies like Moody’s, Fitch, and Standard and Poor’s grade countries and institutions according to how likely they are to pay back their debts. A country’s credit rating will therefore affect how financially stable and trustworthy it looks to foreign investors, who rely on these indicators to make business and investment decisions. A good credit rating is likely to make buying a country’s bonds more appealing and attract more foreign investment. The lower a credit rating, the more expensive it will be for a country to borrow by selling its government bonds – investors will want higher yields to compensate for the higher risk they are taking.
This is particularly relevant in the context of the UK general election campaign, as all the major political parties have expressed a commitment to increase borrowing. According to Jane Sydenham from Rathbone Investment Management, ‘the vast spending plans announced this week make the UK look a higher risk prospect from an international debt investor’s point of view.’
Arguably, law firms’ clients have been well acquainted with Brexit-induced uncertainty and instability for a while now, so it is unlikely that Moody’s move to lower its outlook will make a huge difference to their mindset. Nonetheless, it is a serious reminder of the potential long-term effects of Brexit on how the UK is perceived internationally.
