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Aramco saga could end with a $25bn whimper

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By Sam Kerr
19 Nov 2019

Saudi Aramco’s decision to make its IPO a local affair, with no international marketing, is a lacklustre end to what is nonetheless a huge capital markets event. Unrealistic objectives and hype have taken the shine off a monumental deal.

Aramco’s predicament is not unusual — the firm is the latest in a long line of sellers whose valuation desires have been dashed at IPO stage by thrifty international investors.

However, the public scrutiny surrounding the listing means that a 1.5% float to an almost entirely domestic audience will feel like a hollow end to what was meant to be an historic IPO.   

When Saudi crown prince Mohammed bin Salman first mooted the deal in 2016, equity markets were overcome with the idea of a 5% flotation of a $2tr company — a $100bn IPO. 

Bankers flocked to Riyadh with overtures and pitch books in a scrap for a slot on the mandate. The stock exchanges of New York, London and Hong Kong battled for the honour to host the deal. 

Now the company will not even market to the buy-side in those cities and the IPO will be much smaller and sold primarily to investors in Saudi Arabia and the Gulf.

Who is to blame for what feels like such a disappointing end? Was it competing bankers telling bin Salman what they thought he wanted to hear — hoping to win the mandate first and worry about the details later? Or was it the crown prince’s fault for believing the hype?

Issuers are bound to push for the highest valuation. Their figures tend to be walked back quickly in meetings with investors.

But few deals have been subject to the same level of public scrutiny as that for the Saudi oil giant.

Numerous investors have told GlobalCapital they thought Aramco was likely worth closer to $1.5tr, notwithstanding any IPO discount.

They worried about buying stock in a company where public shareholders would be in the minority. They were also concerned about the risks involved with owning assets in a troubled region, especially after a drone strike on Aramco processing facilities in September.

Aramco’s price range, set on Sunday at Sr30-Sr32 ($8-$8.53), points to a dividend of around 4.5% for investors. That’s not enough for many international equity funds, which can buy other listed oil majors and earn a higher dividend — Shell yields 6.2% and Exxon Mobil 5.15%.

But that $2tr valuation captured the imagination, making the walk back to the price international buyers were willing to pay too much of a climb down for the state to contemplate, it seems.

Now no one is happy. The coterie of international banks that won the mandate failed to deliver what their client hankered after. The issuer has failed to convince the world that its asset is worth what it thinks it is and has not attracted global money as it seeks to modernise. International investors have missed the chance to buy into what may be the world’s most profitable company.

Saudi is lucky to have the option of doing a local-only deal, luring investors who will pay more for a piece of the action. Many companies that have faced similar price dynamics this year have had to cancel or postpone their listings.

Should Aramco get enough local demand to price at the top of its range, it will command a $1.7tr valuation, easily making it the world’s largest listed company. At that level, it will also still be the largest IPO ever at base deal size, worth around $25.5bn.

However, it will be a diminished offering to what was hoped for three years ago.

The small army of international banks on the IPO will likely look back at the deal, and a smaller fee pool, and wonder when it all went wrong.  

Unfortunately, it was probably right at the start.

By Sam Kerr
19 Nov 2019