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Saudi Aramco wins approval to launch long-delayed IPO

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Via Financial Times

Saudi Aramco has secured approval to finally launch its long-awaited initial public offering on Sunday after delays triggered by doubts over the ability of the world’s most profitable company to secure the $2tn valuation coveted by Crown Prince Mohammed bin Salman.

The kingdom’s Capital Market Authority said on Sunday its board had approved the company’s application for the registration and offering of a proportion of its shares.

The listing of the state energy firm is the centrepiece of Prince Mohammed ambitious plans to overhaul Saudi Arabia’s oil-addicted economy. It is expected to be the world’s largest IPO with Riyadh hoping to raise as much as $60bn. But the process has been dogged by questions over the valuation of Saudi Aramco, with bankers and analysts saying $1.2tn to $1.5tn is more realistic.

The formal announcement of the intention to float Saudi Aramco on the Tadawul, the kingdom’s stock exchange, is the closest the government has come to finalising the listing. The shares are expected to begin trading in December.

Alibaba, the Chinese ecommerce company, launched the globe’s largest IPO when it raised $25bn in 2014.

Prince Mohammed, the kingdom’s de facto ruler, first disclosed his intention to partially privatise Saudi Aramco three years ago, and Riyadh hired advisers to prepare for a listing as early as 2018. Saudi Aramco is expected to sell up to 3 per cent of the company, which made $111bn in net income last year.

However, two people briefed on the process said despite the formal announcement of an intention to float, Saudi Aramco could still pull the listing at a later stage depending on the response from investors.

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The IPO stalled last year amid concerns about the valuation and after the royal court ordered Saudi Aramco to buy a 70 per cent stake in Sabic, the kingdom’s biggest petrochemicals company, from the Public Investment Fund, the country’s sovereign wealth fund.

Riyadh revived the process after company’s debut $12bn bond in April was massively oversubscribed. And it pushed head with the planned listing despite missile and drone attacks, blamed on Iran, in September that struck the heart of Saudi Aramco’s infrastructure, temporarily knocking out half of the kingdom’s crude production.

However, Riyadh postponed the launch of the IPO again last month, although it continued to pressure advisers to ensure the listing went ahead this year with Prince Mohammed keen to prove his economic reforms are on track, analysts say.

Saudi Aramco has repeatedly said the timing of any IPO will “depend on market conditions and be at a time of the shareholders’ choosing”.

Bankers say there is enthusiasm among Saudis for the listing, with domestic investors expected to comprise the bulk of the offering. Local banks are expected to lend heavily to Saudis to enable them to buy shares.

Wealthy merchant families — many of whom were ensnared in Prince Mohammed’s corruption crackdown in 2017 that saw some 300 tycoons and princes detained — have been pressured to invest in the company to ensure the success of the listing.

Foreign investors, meanwhile, have been more sceptical about the kingdom’s valuation expectations. They cite governance issues and state interference in corporate strategy of the company — Saudi Aramco’s $69bn acquisition of Sabic was in part motivated by Riyadh’s need to raise cash for the PIF. The proceeds of the IPO will go to the PIF, which faces huge funding commitments as it oversees a series of megaprojects in the kingdom.

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The attack in September also raised concerns about Saudi Aramco’s ability to protect its energy assets in the world’s top oil exporter.

Riyadh has also approached sovereign wealth funds in the Middle East and elsewhere to invest in the IPO. Most of the world’s major banks, including JPMorgan, Goldman Sachs, Morgan Stanley and Citigroup, have been working on the listing.

Several people close to Saudi Aramco lay a large part of the blame for the company’s struggle to convince investors of the valuation on the advisers and bankers working on the IPO. The people say the advisers have failed to sufficiently challenge Prince Mohammed’s expectations.

In a bid to ensure Saudi Aramco secures the highest valuation possible, the company has announced an annual dividend of $75bn, changed royalty payments to the government and scaled back long-term investment plans.

But if Saudi Arabia insists on the $2tn valuation, it would imply investors would receive a dividend yield that is lower than that for international rivals such as Royal Dutch Shell or ExxonMobil.

A listing this year would come as global energy companies are under pressure, trying to navigate an environment of lower oil and gas prices, weaker demand and lower chemicals margins.

It also comes as the world’s energy majors are under pressure from investors to take greater responsibility for their role in causing climate change. Saudi Aramco’s production costs are among the cheapest in the world, which it believes will hold it in good standing.

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