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Sun 17 Nov 2019 10:39 AM

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Saudi Aramco seeks $1.71 trillion valuation in world's biggest IPO

In an updated prospectus published on Sunday, Saudi Aramco said it is seeking to raise as much as $25.6 billion by selling a 1.5% stake

Saudi Aramco seeks $1.71 trillion valuation in world's biggest IPO

Aramco will publish the final price and thus valuation on Dec. 5. Courtesy: AFP/Getty Images

Saudi Arabia put a valuation on state-owned oil giant Aramco of between $1.6 trillion and $1.71 trillion, well short of the $2 trillion target sought by Crown Prince Mohammed bin Salman since he first mooted an initial public offering in 2016.

Aramco will sell just 1.5% of its shares on the local stock exchange, the Tadawul, somewhat less than expected. At the lower end of the price range, the offer would fall short of a record, coming in just below the $25 billion raised Alibaba Group Holding Ltd.’s in 2014.

While the target valuation will make Aramco the world’s biggest public company by some distance, overtaking Apple Inc., the plans are a long way from Prince Mohammed’s initial aims: a local and international listing to raise as much as $100 billion for the kingdom’s sovereign wealth fund.

In a sign Aramco will rely heavily on local investors after receiving a tepid response from international money managers, the shares won’t be marketed in the US and Canada as originally planned. Japan’s also off the list.

Aramco Chief Executive Officer Amin Nasser kicked off the IPO’s final phase at a presentations for hundreds of local fund managers in Riyadh. The roadshow is expected to move on to Europe this week.

Nasser called it “a historic day for Saudi Aramco for tadawul and the kingdom of Saudi Arabia,” he said. “We are excited about the transition to being a listed company.”

The final version of the prospectus didn’t name any cornerstone investors, though the company is still in talks with Middle East, Chinese and Russian funds.

Aramco will need to lean heavily on local wealthy families, some of whom had members detained in Riyadh’s Ritz-Carlton hotel during a so-called corruption crackdown in 2017, to get the job done.

Foreign investors had always been sceptical of the $2 trillion target and recently suggested they would be interested at a valuation below $1.5 trillion. That would offer a return on their investment close to other leading oil and gas companies like Exxon Mobil Corp. and Royal Dutch Shell Plc.

The new valuation implies Aramco, which has promised a dividend of at least $75 billion next year, will reward investors with a dividend yield of between 4.4% and 4.7%. Exxon Mobil pays a dividend yield of just under 5%, while Shell pays 6.4%.

More details   

  • Price range: 30 riyals ($8) to 32 riyals per share
  • Aramco will publish final price and valuation on Dec. 5
  • Shares won’t be offered in U.S., Australia, Canada, Japan
  • Listing date for Aramco shares still to be announced

Saudi Arabia has been pulling out all the stops to ensure the IPO is a success to a sceptical audience. It’s cut the tax rate for Aramco three times, promised the world’s largest dividend and offered bonus shares for retail investors who keep hold of the stock

“We expect a decent cover in the range of two-to-three times over-subscription for this size,” said Aarthi Chandrasekaran, a portfolio manager in Abu Dhabi at Shuaa Capital. “From a retail perspective, assured bonus shares and fixed dividend will support the stock price in the secondary market.”

Aramco has also faced the challenge of the strengthening global movement against climate change that’s targeted the world’s largest oil and gas companies. Many foreign investors are concerned the shift away from the internal combustion engine - a technology that drove a century of steadily rising fossil fuel demand -- means consumption of oil will peak in the next two decades.

Speaking in Riyadh on Sunday, Nasser acknowledged the prospect of peak demand, but argued that with lowest production costs in the industry, Aramco would be able to win market share from less efficient producers.

The Aramco IPO is a pillar of Prince Mohammed’s much-hyped Vision 2030 plan to change the social and economic fabric of the kingdom. The plan, which relies heavily on attracting foreign investors into Saudi Arabia, suffered a big setback after the assassination in 2018 of government critic Jamal Khashoggi in Saudi Arabia’s Istanbul consulate.

Proceeds from the IPO will be transferred to the Public Investment Fund, which has been making a number of bold investments, ploughing $45 billion into SoftBank Corp.’s Vision Fund, taking a $3.5 billion stake in Uber Technologies Inc. and planning a $500 billion futuristic city.

No matter what the final valuation, the share sale will create a public company of unmatched profitability. Aramco earned net income of $111 billion in 2018 on revenue of . $315 billion.