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Saudi faces big decision over Aramco IPO

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By Sam Kerr
22 Oct 2019

After another delay to the IPO of Saudi Aramco, Saudi Arabia’s crown prince Mohammed bin Salman (MBS) may have to accept that international fund managers may never value the kingdom’s prize asset as much as its royal family does, but local investors just might.

Saudi Aramco can almost certainly be listed this year if MBS wants it to be. It might even be able to get its sought after $2tr valuation. But this will rely upon a local investor base dying to own a slice of the kingdom’s prime wealth generator.

Saudi IPOs can often generate a huge domestic following, with demand coming from wealthy locals as well as a vast pools of retail capital.

When National Commercial Bank (NCB) was listed in 2014 for $6bn, sources say it attracted around $80bn of local demand.

Even if only 3% of Saudi Aramco was floated, it would be the largest deal in history at $60bn, should locals value the company at $2tr.

Should Aramco also attract a sovereign wealth fund, or perhaps form a strategic ally of Saudi Arabia, as a cornerstone, covering the largest IPO in history would be even simpler.

However, what does not seem likely is an IPO valuation of $2tr from a mix of large, international money managers.

This appears to matter to Saudi Arabia and MBS, who is seen as a moderniser trying to wean his country’s economy off its reliance on oil.

On its numbers alone, Aramco can argue that it is the largest company in the world, as it generates the most revenue of any other company and earns around twice the profits of US tech giant Apple.

A desire to have Aramco recognised as the world’s foremost company is why Saudi Arabia has considered international listings in London, New York and Hong Kong in the past two years. And it is why it hired an IPO syndicate that incorporates almost all of the world’s most prominent investment banks.

However, international investors have told GlobalCapitalthat they are uncomfortable with a $2tr valuation, or even $1.5tr, in a market where large IPOs have often failed to perform.

The drone attacks on Saudi oil facilities in September only heightened their resolve that Aramco was a more complicated investment than one in other oil majors. Far from commanding a premium to firms like Shell or BP, as it would need to do to meet a $2tr valuation, the political risk means Aramco would require a discount.

If Saudi Arabia’s prime rationale for listing its premier asset is to raise capital and to give local investors a chance to share in the kingdom’s wealth, then Aramco could be a public stock on the Saudi Tadawul by the end of the year.

But if it wants the prestige of having the world’s premier listed company — whatever that is worth beyond global elite bragging rights — and an international shareholder register worthy of that title, then it will have to rein in its pricing ambitions.

By Sam Kerr
22 Oct 2019