The IPO road show is on and shares are already on offer starting this past Sunday for institutional investors, while retail investor have to wait just a little bit longer.
But what’s the mood like?
Mixed response by Global investors
Aramco is not worth the $2 trillion the kingdom originally sought, but even at a valuation of $1.6 trillion to $1.7 trillion it may still be too pricey for foreign investors, according to Reuters.
Valuing Aramco shares at between 30 riyals and 32 riyals ($8-$8.5), is a narrow range which implies a high level of confidence in demand for the offering.
This will give Saudi’s Public Investment Fund (PIF) around $25 billion.
International institutions, meanwhile, would have preferred a valuation between $1.2 trillion and $1.3 trillion, at which level Aramco shares would yield about 6%, based on the company’s promise to pay annual dividends worth at least $75 billion for the next five years, according to Reuters.
This implies that Saudi is prioritising valuation over foreign appeal.
That is in line with the average yield offered by other listed oil giants. Exxon Mobil pays a dividend yield of just under 5%, while Shell pays 6.4%.
The expectation that most foreign investors will pass helps explain why Saudi is offering only 1.5% of the shares, rather than 2% or even 3%. A sale of 1.5% is about 3 billion shares from 20 billion regular shares available.
IPO to support Sovereign’s Net Asset Position
S&P Global Ratings said that Saudi Aramco’s forthcoming IPO on the Saudi Stock Exchange (the Tadawul) could enable the sovereign to further strengthen its net asset position.
We understand that the bulk of the funds raised will go to the government or the Public Investment Fund, potentially adding to the sovereign’s already strong fiscal net asset position of 72.7% of GDP.
Public investment in Saudi Arabia is forecast to remain quite high and current forecast for average GDP growth is 1.6% per year in 2019-2022.
Saudi Arabia will remain by far the largest shareholder in Saudi Aramco and plans to retain control over the company’s business and financial strategy.
As a result of the recent bond and forthcoming equity offerings, there has been an increase in financial and operating disclosures.
“In our view, this has improved transparency and is supportive for investors,” said S&P Global.
Road show investors and local incentives
The offering – or book-building – period for institutional subscribers, which started last Sunday, November 17, 2019 closes on December 4, 2019, while the retail offering for individual investors will begin on November 21 and will end on November 28, 2019.
Samba Capital & Investment Management Company has been designated as issue manager while National Commercial Bank, Saudi British Bank, Samba Financial Group, Saudi Investment Bank, Alawwal Bank, Arab National Bank, Albilad Bank, Aljazira Bank, Riyad Bank, Al Rajhi Bank, Alinma Bank, Banque Saudi Fransi and Gulf International Bank were named as receiving banks according to Arab News.
The final pricing for the Aramco shares would be announced on December 5, the company said.
If oil prices stay elevated, retail investors who snap up 0.5% of the company, with the help of loans from local banks, will have been motivated by more than national pride. Saudi investors are incentivized to buy as they will receive a free Aramco share for every 10 bought, up to 100 shares, only if they keep the shares unsold for 6 months. Saudi Aramco also intends to buy $1 billion worth of shares for its employees, under special terms.
In a sign Aramco will rely heavily on local investors after receiving a tepid response from international money managers, the shares won’t be marketed in the U.S. and Canada as originally planned and Japan’s also off the list, according to Bloomberg.
Aramco Chief Executive Officer Amin Nasser plans to take a fund managers’ roadshow to Europe this week.
World’s Biggest IPO?
At the top end of range, Aramco’s IPO would be bigger than Alibaba’s.
Speaking in Riyadh on Sunday, Nasser acknowledged the prospect of peak demand, but argued that with the lowest production costs in the industry, Aramco would be able to win market share from less efficient producers.
Proceeds from the IPO will be transferred to the Public Investment Fund, which has been making a number of bold investments, plowing $45 billion into SoftBank Corp.’s Vision Fund, taking a $3.5 billion stake in Uber Technologies Inc. and planning a $500 billion futuristic city NEOM.
No matter what the final valuation, the share sale will create a public company of unmatched profitability. Aramco earned net income of $111 billion in 2018 on revenue of $315 billion.