Questions over valuation delaying Aramco’s IPO

Updated October 27, 2019

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Just days before a widely expected official approval, for what would be the world’s largest initial public offering (IPO) ever, Saudi Arabia has delayed, yet again, the much-hyped listing of its oil giant Aramco - by at least several weeks. — Reuters/File
Just days before a widely expected official approval, for what would be the world’s largest initial public offering (IPO) ever, Saudi Arabia has delayed, yet again, the much-hyped listing of its oil giant Aramco - by at least several weeks. — Reuters/File

Just days before a widely expected official approval, for what would be the world’s largest initial public offering (IPO) ever, Saudi Arabia has delayed, yet again, the much-hyped listing of its oil giant Aramco - by at least several weeks.

With international investors not really buying the Saudi price tag of $2 trillion for the biggest oil company in the world, Riyadh had little option, but to delay the listing - once again.

Over the past two months, once the Khashoggi saga was almost sidelined, Aramco had noticeably accelerated the timeline for the much-hyped listing. The $2tr valuation that the Saudis have been seeking, has been one of the sticking points, together with the international venue for the listing and concerns over the transparency of Saudi reserves.

At a meeting to endorse the IPO last week, the banks Aramco had hired for the listing, made clear that foreign investors were not rushing in to invest in the Saudi state oil company at the targeted valuation of $2tr, Bloomberg reported.

Most bankers didn’t agree with the valuation of the company that Saudi Crown Prince Mohammed bin Salman (MBS) and his negotiating team have been insisting upon. According to one of those sources, if Aramco wanted to stir real interest among international investors, the valuation needed to be closer to $1.5tr.

During the meeting, bankers highlighted the lack of appetite among the international players in investing in the state oil firm of the kingdom, where production levels, governance, and management would continue to be controlled by Saudi Arabia. With Aramco potentially listing just 5 per cent on the stock market, all major decisions at the company would also remain in the hands of Riyadh - the Organisation of the Petroleum Exporting Country’s largest producer and its de facto leader.

With the emergence of alternatives, the ongoing shale revolution and the future of crude demand at risk, courtesy the ongoing climate debate and the Green movement, not many seemed ready to make the bet, with a $2 trillion tag on it, bankers insisted.

Can now Riyadh realise its valuation target of $2tr remains a moot point of discussion.

As per Bloomberg, MBS has now two options. One is to drop the $500 billion from his initial $2tr valuation or to raise the money from wealthy Saudi families or from the sovereign wealth funds. Talks reportedly took place with Abu Dhabi Investment Authority, Singapore’s GIC and other funds.

Looking to diversify their portfolio, sovereign funds in the oil-rich Gulf region were known to be typically shy of energy exposure, reports indicated. On its part, Aramco wanted the anchor investors to cover no less than 40pc of the offering.

Sovereign wealth funds were thus not eager to jump on. One Gulf institutional investor, involved in the discussions, said Aramco was unable to answer valuation questions fully, during initial talks with investors.

A debate within Saudi Arabia is also raging – in hushed tones. Informed circles indicate that the head of the former, high profile, Saudi Energy Minister Khalid Al-Falih had to be rolled, once it was felt, he was not too enthusiastic about the IPO, given the current oil market environment. He had to pay a price and so he did.

A highly-paid army of bankers, financial advisers, consultants and public relations flacks drafted into the kingdom, have once again failed to deliver the Aramco IPO on schedule.

Yet, there are silver linings at the end of the tunnel too. A number of Russian investors are interested to invest in Saudi Aramco, Kirill Dmitriev, the chief executive officer of Russian sovereign wealth fund RDIF said while in Riyadh.

China has also offered to buy up to 5pc of Saudi Aramco directly, recent reports said. Chinese state-owned oil companies PetroChina and Sinopec have written to Saudi Aramco in recent weeks, expressing their interest in a direct deal, industry sources told Reuters. “The Chinese want to secure oil supplies,” one of the industry sources said. “They are willing to take the whole 5pc, or even more, alone.”

The issue of valuation here is still not clear though.

Sources told Reuters a couple of weeks earlier that Saudi Aramco was evaluating a private placement of shares to a Chinese investor as a precursor to an international IPO. Sovereign wealth funds from South Korea and Japan, other major buyers of Saudi oil were also interested in acquiring a stake in Aramco – and for obvious reasons.

Yet, the task is uphill. Royals generally do not swallow their words. MBS may not be an exception, too.

Published in Dawn, October 27th, 2019