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Could Aramco renege on the IPO plan?

Armaco’s 5% share sale, or IPO, has seen its share of discussions, and it’s still anyone’s guess where and when it will take place, despite assurances that 2018 will be the year. The main issue is its valuation. Is the company worth $2trn?

We touch on that in the following coverage.

There have been rumors in the past few days that Aramco may put aside its IPO in favor of private share placement.

However, Aramco CEO Amin Nasser stepped up quickly to deny those rumors and assure that the IPO is still planned to take place in the second half of 2018.

But why is Aramco insisting on the IPO?

Economic diversification

The plan to float five per cent of state-owned Aramco goes in parallel with the Kingdom’s plan to diversify the economy and reduce its dependence on oil.

The IPO could infuse much needed funds to compensate for losses incurred as a result of low oil prices which since 2014 have let to severe budget deficits in Saudi and other oil-dependent nations.

The plan is to sell five per cent of the company, valued at $2 trillion, thus earn $100 bn in revenues. Then, the profits from the IPO will go to the Saudi Public Investment Fund (PIF), which will allow the PIF to increase its investments at home and abroad.

Read: Saudi Aramco floating shares, but it’s not sure where

In his first-ever interview, Yasir Al Rumayan, Managing Director of Saudi Arabia’s PIF, told Bloomberg in a televised interview that the Kingdom’s fund aims to have at least $2trn of assets under management by 2030.

He added that the sovereign wealth fund is targeting investment returns of 8 to 9 per cent and constantly looking for new partners.

In May, the PIF agreed to commit $20bn to an infrastructure investment fund with Blackstone Group LP and to invest as much as $45bn in a technology fund run by SoftBank. These deals followed a $3.5bn investment in U.S. ride-hailing company Uber Technologies Inc. in June 2016.

The Wall Street Journal reported this year that the company had long been planning the Aramco IPO for 2018, with New York and London markets as prime targets, but that a listing on Riyadh’s Tadawul Stock Exchange in 2019 was part of the thinking as well, even though Tadawul does not have the level of sophistication for such large transactions.

But can’t a private placement yield the same results?

IPO vs. private share placement

It’s possible that a change of mind on the Aramco IPO could paint a picture of hesitancy in the Kingdom, which usually doesn’t sit well with potential investors.

However, a private placement may hold more advantages than an IPO.

Research reveals that, although a private placement may not earn as much money compared with an IPO, the expenses associated with a private deal are lower. Private placements can also be completed quicker than IPOs. The privacy of the company can be protected, while still gaining access to liquidity or cash from the deal.

Karen Young, a scholar at the Arab Gulf States Institute in Washington, was quoted by the Daily Mail as saying that, for the IPO to succeed, Aramco’s oil reserves would have to be independently verified and its internal finances reliably audited. This means that pricing is time and market dependent and such evaluations are non-negotiable, not like a straight sale.

Read: Saudi Aramco to list locally and abroad in 2nd half of 2018 – CEO

Some analysts believed that IPO price tag was too generous, according to CNN Money.

Moreover, an environmental campaign group, as stated by Oil, said that the value of the Saudi state oil giant could be greatly reduced, due to climate policies that are set to fight global warming.

Oil Price quoted a report by Oil Change International as saying that most analyses valuing Aramco at between $1 trillion and $1.5 trillion fail to acknowledge the impact that climate change policies could have on the valuation of the Saudi firm.

“Compared to a base-case estimate of around $1.5 trillion, Aramco’s value could be 25 percent to 40 percent lower in the safer-climate scenarios of the International Energy Agency (IEA),” quoted the report as saying.

Another advantage of seeking private share placement is to avoid losing control over the company. The company can just perform its duties and responsibilities more freely without having to answer to thousands of outside stakeholders.

Aramco has so far denied all reports about the plans by Chinese investors to buy five per cent of the company.

But Forbes displays five possible scenarios for a sale of a portion of Saudi Aramco.

Read: Bloomberg: Saudi Aramco needs $60-$70 oil for IPO 

Five possible scenarios

One: Aramco would IPO about five per cent of the company sometime between the end of 2018 and 2019. Shares would be listed on multiple exchanges to accommodate the size of the sale and to convenience potential investors.

Two: The King would sell a portion of his shares in Aramco to a private buyer or multiple private buyers. Again, this would likely be a sale of about five per cent of Aramco.

Three: Another option that gets less attention is that Aramco could pursue a smaller IPO to be listed on Tadawul alone.

Four:  A fourth option is a combination of the first three. The King could first sell a small percentage to private investors, such as prime customers and business partners, in order to give them a leg up before an IPO and to set a baseline valuation for the company.

Five: The final scenario is if Aramco and the King renege on the plan altogether.