IPO of Aramco

On November 3rd, 2019, the Capital Markets Authority (CMA) issued its resolution announcing the approval for Initial Public Offering (IPO) of Saudi Arabian Oil Company (Saudi Aramco) on the Saudi stock exchange Tadawul. Since Nov 7th, 2019, institutional as well as retail investors have been able to submit their bids for the shares and the allocations will be finalized post the submission deadlines. The Offer Price Range for the Offering has been set at SAR 30 to SAR 32 per Share and the Final Offer Price will be determined at the end of the Book-Building Period. Individual Investors have subscribed based on a price of SAR 32, which is the top end of the price range. Any difference in the price once the shares start trading can be, either refunded or considered for an allotment of additional Offer Shares. The base offer size will be 1.5% of the Company’s outstanding shares and is aimed at raising about $25 billion.

The IPO of Aramco, which is set to be the biggest in history and marks the floatation of the most valuable company in the world, valued between 1.6 and 1.7 billion Dollars, is one of the major steps taken by the Saudi government to diversify its economy beyond oil, attract foreign investments into the country, and raise capital to invest in their initiatives as they work to achieve their ambitious Vision 2030 goals. Initially targeting a valuation of $2 trillion and hoping to raise $100 billion from the sale of 5% of Aramco’s shares, the Saudi government has decided to settle for the lower valuation given the appetite of the market and are consequently offering a much smaller share at a much lower valuation. Initial plans also included listings on foreign exchanges, however, the lack of appetite from international investors have led the company and government leaders to focus on domestic and regional market for the time being.

On the other hand, according to financial advisors of the IPO, which include some of the biggest names in the financial world such as Citigroup, JP Morgan, Morgan Stanley and Goldman Sachs, the IPO has been very popular, and it has seen a lot of demand from both domestic and international investors. They have announced that bids with a value of $44.3 billion have been received from retail and institutional investors for the $25.6billion worth of shares on offer. That includes 54% from corporates in the Kingdom, 24.1% Saudi funds and investment institutions, and 10% non-Saudi investors. This has been seen as early signs of success for the IPO and should in theory push up the share prices once they start trading on Tadawul. As Rania Nashar, deputy chairman of Samba Capital, one of the advisers, said the IPO was “a source of pride” for the Kingdom. “It is an indication of success and a signal of confidence, further bolstering the reputation and prestige of a company that has unrivalled standing globally in the energy sector.”

Although the size and reach of Saudi Aramco as the biggest oil company with access to the largest reserves in the world cannot be disputed, it is the valuation that the company seeks, as well as other risk factors, that seem problematic for international investors. Therefore, if one were to risk their hard-earned money in hopes of positive returns from the IPO, it would be advisable to adopt a more cautious approach and look beyond the positive regional headlines to make an investment decision. Given that the majority of domestic as well as regional news channels are incentivised to shed a positive light on the IPO, it would be irrational to depend on their headlines to make an investment decision. Beyond the headlines, there are a number of other unfavourable factors associated with the IPO that add to the risk factor.

Firstly, the overwhelming demand, which is seen as a huge positive, is coming mainly from domestic corporations and institutional investors, whose metrics for measuring the viability of the investment in the IPO may be very different to a retail investor hoping to make positive returns from their investment. A number of local investors have not even had the opportunity to run their typical analysis and decide whether or not they would like to invest. Instead, they have been pressured by the government to buy into the IPO and therefore, boost the valuation of the company. According to a person briefed in the meeting between Aramco seniors and their financial advisors, “There were basically two options — an international deal valued at $1.5tn, which could possibly have been walked up to $1.6tn, or a local version coming in at $1.7tn,”. This is indicative of the scepticism that foreign investors, who have the freedom of choice, have placed on the IPO and its viability as an investment. Aramco has as a result decided not to pursue their planned roadshows in regions such as Europe, and instead focus on domestic and regional investors, who the government can influence.

In addition, corporations and institutions in the Kingdom who may have not been directly pressured to invest have the incentive to buy favour and not disappoint the government in their treatment of the IPO. If you are a large corporation or institutional investor operating in such an autocratic country with stringent control from the government, it would be irrational to stay away from the IPO or mention it unfavourably in your announcements. That also applies to aforementioned news channels which have been reporting with incredibly promising headlines.

Also, the Saudi government has also turned to the investment funds of its regional allies including sovereign funds in Abu Dhabi and Kuwait, as well as other government-related firms in Russia, China and Malaysia that could still create additional demand. Abu Dhabi is expected to invest $1.5bn, while Kuwait is also considering putting in $1bn. Once again, those government investment funds are more likely to be measuring the viability of the investment as a strategic one and as a way of strengthening their relationship with Saudi Arabia. This not only is indicative of a lack of true value, but also poses a risk of share prices crashing if there are any geopolitical clashes with the governments involved.

In addition, the participation and subscription for the purchase of shares has been made incredibly easy for retail investors who have been offered 0.5% of the shares. Banks on the deal have said that about 4.9m retail investors in the kingdom bid for shares, with a total valuation of 47.4bn Saudi riyals ($12.6bn). Retail investors willing to bid for the shares have been able to do with a few clicks of buttons. This is an important step from the financiers of the IPO to encourage further investment and consequently boost the price of the shares on offer, a factor that could have contributed to the oversubscription mentioned earlier. However, judging by the interactions with locals, some of whom have submitted their bids for Aramco’s shares, one can easily realize their lack of understanding and sophistication. These retail investors most of whom have no prior experience of buying stocks, particularly not IPOs which require significant analysis, seem to be doing so based on their judgment of the IPO from local news channels and the general sentiment in the domestic market. Both of these, as mentioned earlier, are significantly and unjustifiably pressured towards shedding a positive light on the IPO and encouraging people to buy the shares on offer. For some of these investors, the IPO represents a significant event bringing Saudi Arabia a step closer to its Vision 2030, and they are hoping to play their part and “support” the government by investing their money. Asked on the prospects of the shares and prices over the next two years, one mentioned, “I don’t really know, I am just using my playing money that I had on the side”. Not to question their intellectual capacity as accomplished individuals, their participation in the IPO and the oversubscription to the shares on offer can certainly not be used as an indicator of true value and a sustainable investment for the long-term.

It could perhaps be argued that, regardless of their understanding, a high level of interest from retail investors shows greater levels of demand and given constant supply, should lead of higher prices and therefore higher profits for investors. However, it should be noted that inflationary pricing can be extremely risky and create a bubble-like situation that can burst anytime. Particularly, once the lock up period expires and investors are able to sell their shares back in the market, that could lead to significant drops in the share price and therefore significant losses for the investors. This can be further worsened by the reaction of unsophisticated retail investors who might panic and dump their shares to the market to minimize their losses. As a result, the upward inflationary spiral that seems to be brewing now, may change and turn into a crashing downward spiral.

**********************************************************

Foreword: Please note that the opinion and stance mentioned below is entirely personal and does not represent those of any institutions that I have worked with or have any affiliations with. Investments pose the risk of capital loss and you may or may not engage with the IPO at your own risk. I am not liable for any gains or losses and it is advisable to seek professional advice.

REFERENCES