Via Financial Times

Saudi Aramco will offer a stake of 1.5 per cent in its initial public offering at a price range that implies a valuation of $1.6tn-$1.7tn for the company after international investors baulked at the initial target of $2tn.

The company made the announcement of a 30-32 riyal range on Sunday as it kicked off a roadshow to attract orders for the IPO, which aims to list shares on Riyadh’s Tadawul exchange next month.

The target suggests the company has bowed to investor concerns about the $2tn valuation sought by Mohammed bin Salman, the country’s powerful crown prince.

The issuance will seek to raise $24bn-$25.6bn for the government. The lower end of this range would amount to a smaller deal than the $25bn raised by Chinese ecommerce giant Alibaba’s record IPO in 2014.

Initial soundings to international investors revealed scepticism about the high valuation sought for the company, according to people briefed on the discussions.

Banks appointed to manage the offering have issued research with a wide range of about $1.1tn-$2.5tn, underscoring the difficulties of coming up with a valuation that placates both investors and Saudi authorities.

Overseas institutions suggested a $1.2tn-$1.5tn valuation would be more realistic for the company, which made $111bn in net profit last year, according to bankers familiar with the process.

Saudi Aramco has visited China and Russia over the past few weeks in a bid to underpin demand for the IPO from countries that have been keen to deepen ties with the oil-rich kingdom.

Saudi bankers report plentiful domestic demand for the issuance, with pressure on large families and institutions to apply for allocations of shares at the higher end of the valuation.

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A wave of retail investment, sweetened with the issuance of bonus shares to Saudi nationals and ample bank lending for allocations, is also expected for the 0.5 per cent of shares earmarked for Saudi individuals.

The bookbuilding process begins on Sunday and ends for institutions on December 4 while retail subscriptions close on November 28.

Overseas investors have concerns about security after September’s devastating aerial assault on Saudi oil installation, as well as governance issues with the state’s control over Saudi Aramco strategy. Fears over the economic fundamentals driving the oil price, such as US-Chinese trade tensions, are amplified by strong US shale oil production.

After several false starts, the part-privatisation of the country’s largest revenue earner is a litmus test for the crown prince’s ambitious economic reform programme which aims to reduce the kingdom’s economic dependence on oil.

Selling off a stake in Saudi Aramco could presage a broader privatisation plan for the kingdom’s assets as the state seeks to drive non-oil growth and create jobs for its young population.

S&P Global Ratings last week said the effective deployment of the IPO proceeds to the Public Investment Fund, the crown prince’s preferred investment vehicle, would bolster the kingdom’s net asset position.

The rating agency forecasts annual gross domestic product growth of 1.6 per cent this year through 2022.

“Productively deployed, we believe the assets could also help maintain growth potential through our three-year ratings horizon,” it said.