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Shelved Aramco IPO to hurt Saudi reforms

August 26, 2018

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This file photo shows a view of Saudi Aramco’s Manifa oilfield. The much-awaited IPO of the Saudi Aramco is on the shelf for now as the company failed to attract its desired valuation.—Reuters
This file photo shows a view of Saudi Aramco’s Manifa oilfield. The much-awaited IPO of the Saudi Aramco is on the shelf for now as the company failed to attract its desired valuation.—Reuters

The inevitable has happened. The biggest stock floatation in history has come to a screeching halt — officially and indeed, abruptly. Aramco’s initial public offering (IPO) that has been the talk of the town–or globe to be more precise – ever since it was hinted some two years ago by Prince Mohammad Bin Salman (MBS) of Saudi Arabia, has now been shelved. It is official.

The IPO was the centrepiece of Vision 2030 – the MBS flagship that was to wean Saudi Arabia off the oil income. Once the report was out, eyebrows were raised all around. In order to dilute the impact of the report, Saudi energy minister Khalid Al-Falih had to issue a statement underlining that the (Saudi) government was committed to Aramco IPO “at a time of its own choosing when conditions are optimum.”

Indeed the statement remains open to all sorts of interpretations.

The IPO was doomed for failure from its very inception, many now assert. The first and the largest hurdle was the price tag on it. While announcing the offering some two years ago, MBS had put the value of Saudi Aramco at $2 trillion. Saudi officials hence hoped to raise a record $100 billion by selling a 5 per cent stake in the Saudi state oil company.

But markets were not convinced. Market valuation varied from $500bn to $1.5tr – at best. But if markets didn’t match the value of $2tr, MBS would lose face. He was not ready to accept it. Even politically, that could have been suicidal for him.

There were other issues too. Stock exchanges in financial centres including London, New York and Hong Kong have been vying to host the international tranche of the share sale. The prize was too big to ignore. US President Donald Trump weighed in with a call for Aramco to choose New York for floating its shares. Armies of foreign investment bankers and lawyers were put to work on the offering.

London was also vying for the slot. Prime Minister Theresa May was its chief saleswoman, personally lobbying Khalid al-Falih, during a visit to Riyadh. She pressed on him the merits of London’s expertise and deep, liquid markets. Officials within Saudi Arabia too differed on the choice. It was not a straightforward decision. Too many variables, including legal ones, needed to be considered before making a final move.

Moreover, to generate genuine, international interest in the IPO, Aramco needed to open its books further. Riyadh definitely took some steps to convince potential. In order to make it palatable to money markets, taxes on Aramco were reduced from 85pc to 50pc.

But despite all this, the entire process had many pitfalls. It was going to take its toll. Riyadh did not appear ready – to meet the demands of the potential investors. Yet, Saudi Arabia needs money to fulfil at least some of its financial commitments. To wean its economy away from oil, it wanted to invest in high tech sectors. Last week Tesla’s founder Elon Musk was reported as saying that the Public Investment Fund (PIF) of Saudi Arabia had enough money to take his company private. Besides others, Saudi Arabia is also committed to a $45bn agreement to invest in SoftBank’s Vision Fund.

Aramco IPO was to take care of some these needs. Now that the IPO has been shelved, the issue is where the money is to come from.

Other avenues are now being tapped. Saudi Aramco is buying controlling stake in the Saudi petrochemical giant Sabic, for as much as $70bn.

In order to finance Sabic purchase, Aramco will need to raise funds from banks and international bondholders. This money will then go into PIF, which currently owns a 70pc stake in Sabic. PIF was initially expecting the money through Aramco IPO. It would still get at least a part of the anticipated money, but not through the IPO, but rather by selling its controlling stake in Sabic.

The main difference would be the origin of cash: rather than equity investors, it would come from bank loans and bond investors. The plans for a bond, likely to be combined with banks loans, are still at a preliminary stage, it now seems, but it would solve one key problem — it won’t put a value on the company and MBS will not be needed to swallow his words — at least for now.

Published in Dawn, August 26th, 2018