Saudi Aramco’s public offering becomes distinctly domestic affair

To encourage robust participation, the Saudi Arabian Monetary Authority is allowing smaller retail investors to borrow twice their cash investment.
Sunday 24/11/2019
Saudi Aramco logo is seen at the oil facility in Abqaiq.  (Reuters)
Crown jewel. Saudi Aramco logo is seen at the oil facility in Abqaiq. (Reuters)

Saudi Aramco’s impending initial public offering has become a distinctly domestic affair, with Riyadh banking on local and regional investors to make the limited sale on the Saudi stock exchange a success after deciding not to court US, Asian and European fund managers.

Foreign investors expressed muted enthusiasm for committing to purchasing stakes in the Saudi oil and natural gas giant on learning that Saudi Aramco’s valuation for the company was higher than what had been deemed acceptable in financial circles.

Despite tepid foreign interest in the initial public offering (IPO), there is great excitement among the Saudi population for the opportunity to own a piece of Saudi Aramco, the country’s state crown jewel that was named the world’s most profitable company in 2018.

Saudi media estimate that up to 5 million people are expected to participate in the Saudi Aramco share flotation on the domestic bourse, the Tadawul. Reports also indicate that the company is close to covering its institutional allotment for the IPO with ten days to go before the subscription deadline.

In a statement November 17, Saudi Aramco said it planned to sell 1.5% of the company on the Tadawul at an offering price of 30-32 riyals ($8-$8.53) a share, resulting in around 3 billion shares sold. Based on those parameters, Saudi Aramco is setting the value of the state oil and gas giant at $1.6 trillion-$1.7 trillion, a far drop from the $2 trillion valuation long-touted by Saudi officials.

The company said the final share price would be published December 5. Trading on the Tadawul is anticipated to begin in mid-December. Retail investors have until November 28 to formally submit requests for IPO shares while institutional investors have until December 4 to subscribe.

Ahead of the Saudi Aramco listing, company executives were to embark on a formal roadshow to gauge interest from institutional investors in the United States, Canada, Europe and Asia but pushback from international money managers on the higher valuation prompted the roadshow to be cancelled.

At a November 17 presentation for local fund managers in Riyadh marking the final preparation stage for the IPO, Saudi Aramco CEO Amin Nasser noted that it was “a historic day for Saudi Aramco… We are excited about the transition to being a listed company.”

In its IPO prospectus, Saudi Aramco said it would sell up to 0.5% of its shares to retail (individual) investors. The prospectus stated: “Certain Saudi retail investors who continuously and uninterruptedly hold their shares for 180 days will receive one bonus share for every ten shares they purchase in the offering, up to a maximum of 100 bonus points.”

While the bonus shares are meant to be an incentive for Saudi individual investors, the time requirement for holding onto the purchased shares is to ensure that shares aren’t flipped for a quick profit and to prevent price volatility.

Saudi Aramco has been a symbol of national pride for the average Saudi citizen so it is not surprising that the IPO is being perceived as a once-in-a-lifetime investment opportunity in the kingdom. Based on the company’s valuation, retail investors will account for approximately $8.5 billion worth of shares sold through the IPO.

To encourage robust participation, the Saudi Arabian Monetary Authority is allowing smaller retail investors to borrow twice their cash investment. To sweeten the pot, Saudi Aramco said it would offer a minimum $75 billion dividend to investors in 2020 and that from 2020-24, any year with a dividend less than that threshold would result in “non-government shareholders” prioritised for payment.

The Saudi government has been leaning heavily on the wealthiest of Saudi families to secure large stakes in the Aramco IPO. The government has also been looking to regional sovereign wealth funds — such as Bahrain’s Mumtalakat, the Abu Dhabi Investment Authority and Abu Dhabi’s Mubadala Investment Company — to serve as cornerstone investors to ensure the sale’s success.

Outside of the region, Chinese state entities such as sovereign wealth fund China Investment Corporation are expected to take part in the Saudi Aramco share flotation.

December’s listing of Saudi Aramco on the Tadawul will be a dramatically scaled down and localised version of the original plan promoted by Saudi officials in early 2016. That plan envisioned selling up to 5% of the company at a $2 trillion valuation on the Tadawul and one or more foreign exchanges, netting as much as $100 billion for Riyadh.

Sale proceeds are to go towards supporting Saudi Vision 2030, the Saudi government’s programme focused on transforming the kingdom’s economy through domestic and foreign investments and reducing the Gulf nation’s reliance on oil revenues.

Faced with numerous obstacles, Riyadh has seemingly dropped plans for a foreign listing. Based on the percentage of shares now to be sold and at the high end of the share price range, Saudi Aramco could raise $25.6 billion in December, which would top the record $25 billion IPO by Chinese e-commerce firm Alibaba’s in 2014.