Complex Made Simple

Why the Aramco IPO is a win-win for Saudi and investors

The Saudi IPO rationale explained.

Aramco is expected to formally approach banks for bookrunner roles over the next few weeks The Aramco IPO would inject cash towards PIF’s key objectives to fund the increase of assets under management from $320bn today to $2trn by 2030 International banks feel that they have no choice...they will again send senior teams to Saudi Arabia to pitch

Much has been debated about Saudi Aramco IPO, with its on-again, off-again behaviour in recent years.

Many speculate it looks less and less likely or not even worth the effort by major banks.

But the Aramco IPO is a financial winner, no matter how you look at it.

Read more: From Saudi Aramco to Saudi Macro: The company is no longer a black box

IPO background and recap

The Saudi energy minister Khalid al-Falih, who also chairs Aramco, said earlier in July the long-awaited aramco listing could happen in 2020-2021.

Reuters reported work on the IPO was interrupted in 2018 when Aramco acquired a 70% stake in local petrochemicals maker Saudi Basic Industries Corp (SABIC) from the Saudi Public Investment Fund (PIF).

The deal was worth $69.1 billion.

“Aramco is expected to formally approach banks for bookrunner roles over the next few weeks,” Reuters said.

“Aramco chose Moelis & Co and U.S. dealmaker Michael Klein as independent advisors, while JPMorgan, Morgan Stanley and HSBC Holdings Plc were among those to secure leading roles in the IPO. HSBC, which was chosen as a global coordinator, could now end up with a more marginal role,” two sources told Reuters.

What Aramco wants from IPO

A promise is a promise. When in Jan 2016, Saudi crown prince Mohammed Bin Salaman announced Saudi would pursue the largest IPO ever, the ground shook and the world was stunned.

Reneging on this promise will reflect negatively on the Kingdom’s credibility.

And while a $2trn valuation for Aramco has been challenged, with many market analysts putting the number at closer to $1.2 trn or $1.5trn, Aramco’s robust profit numbers, its acquisition of SABIC, and bold downstream activities have helped boost the oil giant’s original estimates.

The Saudis plan to offer up to 5% of Aramco at a valuation of $2 trillion in the IPO, bringing in a price of $100 billion.

The Aramco IPO would inject cash towards PIF’s key objectives to fund the increase of assets under management from $320bn today to $2trn by 2030. The shares of Aramco are owned by the PIF.

Read more: Saudi PIF is raising money through debt instruments. So is Aramco. Why?

The IPO makes sense because investors were emboldened by financial data in Saudi Aramco’s bond prospectus proving the firm was the world’s most profitable company last year with a net income of $111.1 billion.

The headline figures for the inaugural bond issue from Saudi Aramco were impressive.

“Orders for the bond offering – over five different maturities (2022, 2024, 2029, 2039, and 2049) – were slightly over $100 billion, compared to the initial target level of US$10 billion,” said OilPrice.com.

What investors want from IPO

Although Saudi Aramco is known for having paid relatively low banking fees in the past, banks competed fiercely for an IPO mandate in late 2016 because it was viewed as a gateway to other deals expected to emerge from Saudi Arabia’s privatisation plan.

“International banks feel that they have no choice…they will again send senior teams to Saudi Arabia to pitch, work and hopefully execute the deal,” a source told Reuters.

OilPrice.com said that being part of a possible $100+ billion deal is an attractive proposition for most banks.

“A long list of the rich and famous in the financial world, such as Goldman Sachs, Citigroup, Evercore, Moelis & Co., HSBC, JPMorgan Chase and Morgan Stanley, have all been parading with their roles,” said OilPrice.

The Financial Times (FT) said UK’s government is more optimistic, and that the IPO could be fast-tracked to earlier 2020, ahead of the country’s hosting of the G20 meetings in November 2020.

The UK shares the US as likely choices for a global offering.

A successful bond could prove financially rewarding  

The standard compensation pot for a usual developed market corporate IPO varies between 0.5% and 1.0% of the total IPO value, and for an emerging market corporate IPO between 2.0% and 2.5%,” reported OilPrice.

Read : Saudi Aramco: Everybody wants a piece of the world's most profitable company

Lead banks could end up splitting between $500 million and $2.5 billion, working on a $2trn evaluation.

“In context, the 35 banks that worked on Alibaba’s $21.8 billion IPO split an estimated $300 million between them, according to industry figures. The team of banks that advised Saudi Arabia’s National Commercial Bank IPO, the world’s second-largest after Alibaba at $6 billion in 2104, received $4.8 million in total fees, or 0.08%,” said OilPrice.

Although Saudi Aramco is known for having paid relatively low banking fees in the past, IPO mandates are viewed as gateways to other deals expected to emerge from Saudi Arabia’s privatisation plans and mega city developments like $500bn future Red Sea city NEOM.