Two years ago, Saudi Crown Prince Mohammed bin Salman’s announcement that Aramco would conduct an IPO for 5% of its shares was by far the biggest news on the planet.
Today, the bigger news is the possibility that it won’t list any time soon, or any more or that it will exclude international markets like London, or New York.
Regardless, the IPO remains an important diversification strategy of Saudi Vision 2030, and the kingdom will do all it can to list to avoid a reputation black eye.
But the IPO is facing a crisis.
50% chance of listing only on Tadawul
Reuters was exclusive in reporting that Saudi Arabia is increasingly looking to just float oil giant Saudi Aramco locally, quoting sources close to the process.
The thinking is the kingdom is counting on being awarded emerging market status by index complier MSCI in June to help Saudi Aramco attract Western funds, in addition to cornerstone investors from China, Japan and South Korea, the sources said, which would warrant the listing on Tadawul
“I would guess it is about evens that there will be no international IPO,” a high-level source familiar with the preparations told Reuters.
“The only thing we know today is that Tadawul will be the key listing location as our national exchange,” Saudi Energy Minister Khalid Al-Falih recently told CNN.
Aramco is probably the most valuable company in the world and could possibly be valued at up to $2 trillion.
Tadawul listing dangerous
In an article to Forbes, Ellen R. Wald, Ph.D. a historian & consultant on geopolitics & energy said that Tadawul is a relatively small exchange, with about $475 billion of value listed.
“The combination of a very large company on a small exchange is extremely risky,” said Wald.
“It could be disastrous for both the Saudi economy and Saudi Arabia’s national oil company.”
Here are some scenarios Wald offered.
1-If Aramco were to list 5% on Tadawul, Aramco’s $100bn in shares would become a dangerously large part of the exchange, or about 17% of the entire exchange.
“As the price of oil tends to fluctuate, so do the values of oil companies, however, a big drop in Aramco stock would cause the Tadawul index to plummet, which could very likely incite a run on the exchange in Saudi,” Wald said.
2- Saudi lists 3% of Aramco, at a $2 trillion valuation, Aramco’s traded shares would still be more than 10% of the value of Tadawul (based on its current value).
3- Listing 1%, Aramco would constitute 4% of Tadawul.
“At some point after an IPO the state may decide to sell more shares, as it has said it might, and that would only add to the value of Saudi stock circulating on Tadawul,” added Wald, “simply too much for a small exchange.”
Reuters said an Aramco float risked drowning out other shares listed on Tadawul, given daily turnover now is about $1.6bn.
CNBC said that a local stock sale would get around stricter disclosures required by bigger foreign exchanges, like the New York Stock Exchange or London Stock Exchange.
“But both of them, as well as Hong Kong, would provide far more liquidity than Tadawul, however a source close to the IPO said the company’s goal is to issue stock both at home and abroad,” said CNBC.
Though Saudi Crown Prince will shake hands with US president Trump when he meets him later this month, no deal will likely be made for a listing in New York.
Al-Falih has said it would be a risk to list in New York because of liabilities and litigation from families of victims of 9/11 attacks, including the climate change lawsuits against other oil companies by New York City.
According to the Financial Times, the London Stock Exchange is still in the running but not until 2019 at this point.
The reasons involve technical conditions on IPO liquidity and protests against a Saudi-led coalition war campaign against Houthis in Yemen.
MSCI: Game changer
CNBC said one factor favoring the idea of first listing locally is the anticipated award in June of emerging market status for Saudi Arabia by index firm MSCI.
“That designation could bring a wave of foreign capital into the local market next year as global fund managers add Saudi Arabia to their holdings,” it said.
Saudi is counting on being awarded emerging market status by index complier MSCI in June to help Saudi Aramco attract Western funds, in addition to cornerstone investors from China, Japan and South Korea, sources told Reuters.
Falih told CNN “We are waiting for the reforms to be in place and to join MSCI and Aramco listing in Tadawul will be catalytic for that capital market as we bring international capital to the kingdom.”
MSCI will give its decision in June and, if positive, the reclassification would be in two steps in May and August 2019.
Saudi Arabia would have a market capitalization of $124bn in MSCI’s Emerging Markets Index, giving it an index weight of 2.3%, said Reuters.
Another $100 billion IPO infused funds means the kingdom’s weighting would rise to about 4%, which would be bigger than Russia’s weighting of 3.4%.
“If MSCI grants Saudi Arabia emerging market status, it could be seen as a reason to push against an international listing,” sources close to the listing process told Reuters.
As much as $13.6bn could come into Saudi stocks from passive investors and with active investors following an Aramco IPO, total inflows could be $68bn, according to Reuters.