Saudi Aramco, Saudi Arabia’s state-owned oil company, has struck a deal to buy a minority stake in South Korea’s Hyundai Oilbank for W1.37 trillion ($1.2 billion) as the world’s third-largest oil producing country looks to gain a stronger foothold of its downstream business in Asia.
According to the terms of the agreement, Hyundai Heavy Industries will sell 41.7 million shares – equivalent to a 17% stake in the unlisted company – at W33,000 each. The sale price per share is 8.3% lower to that in the preliminary agreement signed in late January.
Saudi Aramco will also have an option to purchase an additional 2.7% stake within five years to increase its interest to 19.7%.
The transaction, which values Hyundai Oilbank at $7.1 billion, implies that the oil refiner is still worth 26% less than S-Oil, its closest rival that is valued at $9.6 billion on the Korea Exchange.
That is despite the fact that Hyundai Oilbank is set to overtake S-Oil as South Korea’s third-largest oil refinery by the end of this year as it expands its crude refining capacity to 690,000 barrels per day.
Monday’s transaction proved to be a relief for Hyundai Heavy Industries as the group has been trying to monetise its stake in the oil refining business through an initial public offering for years.
An IPO for Hyundai Oilbank has been expected since 2012, but the process has been repeatedly delayed amid fluctuating oil prices and uncertainties in the domestic market. The company filed a listing application in July last year but the IPO was again put on hold due to regulatory issues.
Hyundai Heavy Industries said it still intends to pursue an IPO for Hyundai Oilbank despite having already sold a stake in the business to Saudi Aramco.
For Saudi Aramco, the transaction is key to its Asia strategy of investing in downstream assets to ensure demand for its crude oil and to reduce its risk at times of oil price fluctuations. This is particularly crucial for a company that accounts for 15% of the world’s crude oil output.
With 63.4% of S-Oil already in its pockets, the purchase means that Saudi Aramco will hold stakes in two smaller, yet fast-growing refineries in South Korea.
In terms of total capacity, Hyundai Oilbank and S-Oil come slightly behind SK Energy and GS Caltex, the country’s first and second-biggest refineries. GS Caltex is a joint venture between Chevron and local conglomerate GS Group.
It is worth noting that the Hyundai Oilbank stake sale will provide the necessary funding to Hyundai Heavy Industries for its purchase of Daewoo Shipbuilding.
Hyundai Heavy Industries said that the merger with its cash-stripped rival is expected to cost $1.8 billion. The company started to seek regulatory approvals for the merger last week.
The Hyundai Oilbank stake sale is the third billion-dollar asset sale out of South Korea over the last few months.
In November, South Korea’s largest e-commerce platform Coupang sold part of its stake to Japanese tech giant SoftBank for $2 billion. That was a week after private equity firm MBK sold its 22% stake in Coway, best known as a water purifier manufacturer, for $1.5 billion.