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Aramco IPO Waits on Crown Prince as Saudi Rich Pressed to Invest

Published 11/01/2019, 08:58 AM
Updated 11/01/2019, 10:45 AM

(Bloomberg) -- Saudi Crown Prince Mohammed bin Salman will decide in the next two days whether there’s enough support from local investors to finally go ahead with the initial public offering of state oil producer Aramco.

Aramco is preparing to announce its intention to float on Sunday, according to people familiar with the matter. The final decision will be made by Prince Mohammed after he hears feedback from bankers who’ve been pitching the deal to investors in Saudi Arabia and beyond, the people said, asking not to be named discussing private deliberations.

“It will be a Saudi decision, first and foremost; specifically, Prince Mohammed’s decision,” Prince Abdulaziz bin Salman, Saudi energy minister and the crown prince’s half-brother, said earlier this week.

An earlier plan to kick off the share sale in mid-October was shelved after international money managers balked at the $2 trillion valuation the crown prince has placed on the world’s largest oil producer.

Aramco executives held meetings with investors in London and New York over the last week, but there are few signs they are ready to pay the valuation Prince Mohammed has insisted on since 2016. If the IPO goes ahead now, it’s likely to rely heavily on money from within the kingdom.

The richest Saudi families, many of whom had members held in Riyadh’s Ritz-Carlton hotel during 2017’s corruption crackdown, have been pressed to commit large sums to the IPO, people with knowledge of the matter said, asking not to be identified discussing private conversations.

Local asset managers, including those looking after government funds, have also been asked to make significant contributions, while domestic banks have been told to lend generously so retail investors can buy Aramco shares, the people said.

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Whether that’s sufficient to get the valuation to $2 trillion remains to be seen. The prince may need to be satisfied with a figure closer to $1.7 billion, if he wants the deal to go ahead, people said.

For Prince Mohammed, getting the IPO done may be more important than achieving the valuation he initially put forward, for two reasons. First, Saudi Arabia is selling a tiny stake -- probably around 2% -- so he isn’t leaving too much money on the table by accepting a lower valuation.

Second, what happens after the IPO may matter more because the ups-and-downs of the share price will be a barometer of the Saudi economy and a successful IPO now opens the door to further sales.

“It’s very important to make sure it’s a successful IPO, where success is defined as a material price increase after flotation. Maximizing shareholder return at this stage is very secondary,” Ali Shihabi, a Saudi commentator with links to the government, said on Twitter. “Also if large numbers of Saudi retail investors participate, as is expected, it’s essential to guarantee them a good return.”

Riyadh still has ambitions to sell Aramco shares on an international exchange -- bankers have talked about London, New York and Tokyo as possibilities -- and the initial 1-2% stake IPO may be a first step in future sales. In 2016, Prince Mohammed said he wanted to sell about 5% of the company.

Even at a valuation of $1.5 trillion, the IPO would be gigantic. That would still create the world’s largest publicly traded company, far outstripping Microsoft Corp (NASDAQ:MSFT). and Apple Inc (NASDAQ:AAPL)., the only two worth more than $1 trillion today.

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It would also almost certainly mean a record share sale: selling 2% of Aramco’s equity would yield $30 billion for Saudi Arabia’s sovereign wealth fund, surpassing the $25 billion raised by China’s Alibaba (NYSE:BABA) Group Holding Ltd. in 2014.

A successful sale is key to Prince Mohammed’s Vision 2030 plan to overhaul the Saudi economy and end the kingdom’s reliance on oil exports. The proceeds from the IPO will boost the firepower of the OPEC nation’s sovereign wealth fund, which already has investments in funds managed by Blackstone (NYSE:BX) Group LP and SoftBank Group Corp.

Goldman Sachs Group Inc (NYSE:GS)., JPMorgan Chase (NYSE:JPM) & Co. and the other Wall Street giants advising Aramco haven’t given up on luring international investors to the IPO. At management meetings with fund managers in London and New York last week, the reception was mixed, according to people who attended the meetings.

Some investors saw the potential of switching their oil investments to Aramco, where rock-bottom production costs mean they’re likely to outlast less efficient producers as the world shifts away from fossil fuels. But others remain skeptical that Aramco deserves a valuation that would put their dividend yields below established public oil majors like Royal Dutch Shell (LON:RDSa) Plc and Exxon Mobil Corp (NYSE:XOM).

The company is ready and timing will depend on market conditions and be at a time of the shareholder’s choosing, Aramco said in a statement.

If Prince Mohammed decides to give the go-ahead, trading in Aramco stock will start on the Saudi Stock Exchange, the Tadawul, on Dec. 11, according to Al-Arabiya. By the end of 2019, the world’s most valuable company will no longer be listed in New York, but in Riyadh.

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