By Sabah al-Binali
Questioning your investment bankers is a good strategy, not a bad one, writes Sabah al-Binali
Schadenfreude: pleasure derived by someone from another person’s misfortune. That is what Aramco, and Saudi Arabia in general, are victims of.
The news and comments made about Aramco’s IPO is wholly negative. The way the IPO was, and is, being characterized is on par with the flop of WeWork’s IPO. There is a similarity in that both companies differed with the investment banks on the pricing of their shares. But there important differences, not least is that Aramco is massively profitable with huge positive cashflow.
Then there is the point that Aramco has negligible financial liabilities. For example, Aramco can fire its CEO without having to pay him $1.5 billion. Or was it $1.4 billion? But what’s a $100 million for the CEO of an American startup these days?
The pricing of Aramco is based on actual positive cash flows, with the differences between seller and advisor on pricing portrayed predominantly on the expected corporate governance of Aramco.
Even if this was true, which I will argue isn’t later on, the corporate governance of the likes of WeWork and Uber have been in the spotlight and yet they have not garnered anything like the negativity that Aramco has received in the international press. Tesla, which not only has negative cashflow, has actually been sanctioned by America’s Securities and Exchange Commission with regards to their corporate governance.
I can hear the peanut gallery crying out “But what about the Ritz Carlton and Khashoggi?” I am not a political or legal expert so I will not comment about those issues and offer no position on them. But I am an expert in finance and I will comment about how global investors clearly don’t care about those issues when assessing investing in Aramco securities. Why? Let’s look at Aramco’s debut international bond offering from earlier this year, which was completed after the events highlighted by the international media as factors in the pricing of Aramco’s IPO.
To refresh your memories, in April of this year Aramco went to the market for its first ever bond offering. The headline points are that Aramco wanted to issue $10 billion in unsecured medium term bonds. The total demand was over $100 billion, or 10 times what was originally offered. Aramco in the day issued $12 billion in bonds. Clearly there were no fears about Aramco’s corporate governance in April. So what happened in the intervening seven months to the Aramco’s IPO?
According to the international press there have been a lot of “geopolitical” events. I’ll get to that. But the issue of corporate governance which is brought up today with regards to Aramco’s IPO hasn’t changed. There is nothing new. So what about these “geopolitical” events. If such events would affect the share price of Aramco, then they should certainly have an effect on Aramco’s bonds. As of the writing of this article (27/11/2019) Aramco’s 19/49 MTN bond trance is up over 10% from its debut in April. Do the media pundits know something that bond investors don’t? I doubt it.
I’ll debunk one more issue before wrapping up. Much has been made about the expectation Aramco’s belief that the correct valuation for Aramco is $1.7 trillion and the implicit, and usually explicit, ridicule that this was fantasy since the investment banks were pricing it in the $1.2 trillion range. But why is the media assuming that the investment banks are correct and that Aramco is wrong? After all, experience has taught Aramco that the investment banks underprice its securities.
For Aramco’s bond issue to be subscribed more than 10 times over means that the investment banks grossly underpriced the bonds. Furthermore, for it today to be trading over 10% higher in the space of seven months, and an attack on its oil infrastructure, shows that the underpricing of the bonds by the investment banks was severe. I don’t recall the pundits ridiculing the investment banks for so badly underestimating the price of the bonds.
Aramco is like no other company in the world. Aramco is also Saudi’s first major appearance in the global financial markets. Whether the bond was underpriced or the shares are overpriced is not what is newsworthy. This is a normal process of price discovery, and Aramco’s cynicism of investment bank advice on its shares is warranted given the investment banks’ complete failure in pricing its bonds. What is newsworthy is that Saudi is privatizing on a large scale. The Aramco IPO is for only 1.5% of its shares. It is a journey of discovery. Whatever the final price is, there is still over a trillion more dollars by any estimate yet to go, and that is a single company.
The moral of this article? Questioning your investment bankers is a good strategy, not a bad one.