The delayed share sale no ordinary IPO, and it's just not just because of its size
It makes more profit than any other company in the world, but is it the most valuable? The answer could come as soon as November, when Saudi Aramco is finally set to go ahead with a mammoth initial public offering.
The delayed share sale is part of a grand vision to reshape Saudi Arabia’s economy by the kingdom’s controversial Crown Prince Mohammed bin Salman. It’s no ordinary IPO, and not just because of its size.
1. What’s different?
Saudi Arabia is leaning on its allies and subjects to help out. Wealthy families in the kingdom, some of whom were detained and accused of corruption by the government two years ago, have been encouraged to invest. Saudi Arabia is also trying to convince sovereign wealth funds to join the fray.
2. How much is Aramco worth?
That’s the big question. Prince Mohammed caused something of a shock in 2016 when he first announced the plan and estimated the oil giant’s valuation at $2 trillion. That’s almost twice the size of Microsoft, the world’s most valuable listed company. Some equity analysts put the number closer to $1.5 trillion (Bloomberg Intelligence estimates $1.1 trillion). A clearer picture should emerge when analysts publish reports on the IPO this month.
3. Will it be a world record IPO?
That depends on the valuation. The original plan was to sell 5% of the company on international and domestic markets. That would have valued the IPO at something between $50 billion and $100 billion - far outstripping the world record $25 billion raised by Alibaba Group Holding Ltd in New York in 2014.
But the proposal has been scaled back, with plans now to sell around 2% only on the domestic exchange in Riyadh followed by another chunk later, according to people familiar with the matter. A 2% stake sale would, however, represent a world record IPO at the crown prince’s $2 trillion valuation.
An international share sale is still in the offing, possibly as soon as next year. It’s proved fraught with complications. For instance, New York’s appeal was limited by a US law allowing victims of terrorism to sue foreign governments linked to attacks, which may have opened the possibility of litigation targeting Aramco. Overseas listings also open the company to intense and unprecedented scrutiny. Aramco has taken steps in lifting the veil on its operations by releasing financial results.
The timing has raised eyebrows. Oil prices have fallen 30% in the past year 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.
Aramco makes more money than any other company, but investors may baulk if the valuation is set too high, particularly given the political risk. To lure investors, the authorities are reshaping the oil producers’ finances (most of its revenue goes in taxes and royalties to the government) as well as promising bumper dividends.
For instance, the royalty it pays for Brent crude prices below $70 a barrel is falling to 15% from 20%. The “base dividend” in 2020 will be $75 billion - much bigger in magnitude than other oil giants pay but a good deal smaller in terms of yield.
The deal has been extensively marketed to international investors, according to people familiar with the plans, approaches have been made to potential key investors including Malaysia’s Petroliam Nasional Bhd. and China’s Sinopec Group and China National Petroleum Corp.
Aramco is also expected to use offering rules that enable it to market the shares directly to some international investors, according to the people. Following the IPO, foreign fund managers tracking the MSCI Emerging Markets Index are set to buy. They’re already large consumers of Saudi stocks, and Aramco stands to become the largest Saudi stock.