Why Saudi Aramco's IPO Is No Ordinary Share Sale

Saudi Aramco’s much heralded and oft-delayed initial public offering is going ahead - albeit in a scaled-down version of the original plan by Saudi Crown Prince Mohammed bin Salman.

There’ll be no grand opening on the London or New York stock exchanges - the sale is restricted to the Saudi bourse and won’t even by marketed to most international money managers.

Investors will be able to purchase just 1.5 percent of the world’s most profitable company - about half what was previously considered. Even so, the share sale in early December will come close to, or even surpass, the record for the biggest IPO in history.

1. Why was it scaled back?

Because international investors balked at the valuation. The IPO is a key element of Prince Mohammed’s vision to wean the kingdom’s economy away from its dependence on oil. He caused something of a shock in 2016 when he announced the plan together with his valuation of $2 trillion. That would make Aramco almost twice the size of Apple, the world’s biggest company by market capitalisation. Although a reduced valuation of $1.6 trillion to $1.71 trillion was finally settled upon, many global money managers still think that too high. One survey pointed to a “fair” range of $1.2 trillion to $1.5 trillion.

2. So who is investing?

Saudi Arabia is leaning on its allies and subjects - and even its clerics - to help out. Wealthy families in the kingdom, some of whom had members detained and accused of corruption by the government two years ago, have been encouraged to invest. In a sweetener, Saudi retail investors will be eligible to receive one share for every 10 if they hold them for 180 days from the date of the listing in Riyadh. Hours before a presentation in November for local investors, the company surprised the assembled bankers and investors by removing an international offering from the process, meaning Aramco won’t market the deal directly in the US, Japan or Canada. A London presentation was also abandoned.

3. Will it be a world record?

At the higher end of the valuation, the IPO would beat the record $25 billion raised by Alibaba Group Holding in New York in 2014. At the lower end, it would just miss out.

4. Why no overseas sale?

An international share sale may eventually happen, though it’s fraught with difficulties. New York’s appeal is limited because of a US law allowing victims of terrorism to sue foreign governments linked to attacks, which may lead to litigation against Aramco. Overseas listings also open the company to intense and unprecedented scrutiny. Aramco lifted the veil on its operations by releasing six-month financial results, and the company said it earned $68 billion in the first nine months of the year. One advantage for the government of a listing on the Tadawul All Share Index is that it may help the bourse become a gateway for foreign investment into the kingdom. Aramco will become a significant part of the MSCI Saudi Arabia index, and global fund managers tracking the index are likely to start investing then. The domestic focus has sidelined the hoards of global banks advising on the deal.

5. Why now?

The timing has raised eyebrows. Saudi Arabian Oil Co, to give Aramco its formal name, pumps about 10 percent of the world’s oil, yet crude prices have fallen 16% in the past 12 months and the outlook for global growth suggests they may drop further. An aerial attack on Aramco’s largest processing plant in mid-September briefly wiped out half the company’s production capacity, highlighting its vulnerability as well as the region’s heightened geopolitical tensions. Saudi Arabia may be taking the view that it’s better to press ahead in case oil prices continue to slide. The IPO also shines an uncomfortably bright light on slowing oil demand - with even Aramco acknowledging for the first time that a peak might be on the horizon.

6. How attractive is the IPO?

Saudi authorities are reshaping the oil producers’ finances (most of its revenue goes to taxes and government royalties) as well as promising bumper dividends. For instance, the royalty it pays if Brent crude prices are less than $70 a barrel is falling to 15 percent from 20 percent. The “base dividend” in 2020 will be $75 billion - much bigger than what other oil majors pay but a good deal smaller in terms of yield. Aramco is considering lifting that to $80 billion.