How the Aramco IPO postponement impacts oil markets
Saudi Arabia has formally put the initial public offering of its giant oil company on hold while Aramco focuses on buying a strategic stake in local petrochemical group Sabic for as much as US$70 billion.
While the Sabic deal will delay the IPO, it doesn’t mean it’s canceled, people familiar with matter said, asking not to be identified because the information is private. Khalid al-Falih, the Saudi energy minister, said on Thursday in a statement that the government was committed to the Aramco IPO “at a time of its own choosing when conditions are optimum.”
The statement came after Reuters reported on Wednesday that Riyadh had called off the domestic and international listings, citing people it didn’t identify.
Even if the IPO is eventually revived, the Aramco-Sabic deal will allow the kingdom to achieve some of the original aims Crown Prince Mohammed bin Salman set for the jumbo share sale. The main difference would be the origin of the cash: rather than equity investors, it would come from bank loans and bond investors.
Aramco will raise funds from banks and international bondholders to buy a controlling stake in the petrochemical group. That money will go into the coffers of the kingdom’s sovereign wealth fund, which currently owns a 70 per cent stake in Sabic. That will replace at least some of the money the Public Investment Fund had been expected to receive from the Aramco IPO.
Doing a large international bond issue would also compel Aramco to reveal much of the same financial and business information as an IPO prospectus, bringing greater transparency to the world’s largest oil producer.
The board of directors of Aramco took the decision to put the preparations for the IPO on hold at a meeting earlier this month in Switzerland, two of the people said. In his statement, Al-Falih said the timing of the listing would "depend on multiple factors, including favorable market conditions, and a downstream acquisition which the company will pursue in the next few months, as directed by its board of directors."
Bloomberg Businessweek reported in July that the Aramco IPO was going nowhere, saying that even Aramco officials doubted the project would ever see the light of day.
The Aramco IPO has been a centerpiece of Crown Prince Mohammed’s reform program to diversify the country’s economy away from oil, known as Vision 2030. Saudi officials said they hope to raise a record $100 billion by selling a 5 percent stake, dwarfing the current record of $25 billion raised by Chinese retailer Alibaba Group Holding Ltd. in 2014.
The process started in January 2016, when the crown prince said Riyadh was considering selling shares in Aramco, kicking off a deal set to be the world’s largest-ever flotation. For almost two years, Saudi officials repeatedly said the IPO was "on track, on time" for the second half of 2018. Earlier this year, they shifted tack, saying it would be delayed into 2019. In June, Al-Falih diluted further the timeline, only saying it would be "nice" to get it done next year.
After the Aramco-Sabic deal was first revealed, Amin Nasser, the chief executive officer of the state-owned oil company, signaled the plan to buy a stake in Saudi Basic Industries Corp., as the chemical group is known, would delay the IPO.
“A potential Sabic deal would affect the time frame for Saudi Aramco’s initial public offering,” Nasser told Arabiya television in an interview in late July.
The plans for a bond, likely to be combined with banks loans, are very preliminary but it would solve a key problem: Aramco’s valuation. MBS, as the 32-year-old crown prince is known, said the company would be worth at least $2 trillion -- more than double the current market valuation of Apple Inc. -- and perhaps as much as $2.5 trillion. Yet most analysts and investors have said that $1 trillion to $1.5 trillion was more realistic. A bond won’t put a value on the company.
Aramco has hired several Wall Street banks, including HSBC Bank Plc, Morgan Stanley and JPMorgan Chase & Co., which have been working for months to prepare the IPO. The Saudi Arabian Oil Co., as Aramco is formally known, wrote to some but not all of its advisers on the IPO and asked them to suspend work for now, one of the people said.
Al-Falih acknowledged in his statement that Aramco and its advisers have already done all the work needed to sell shares, saying: "The company, for its part, has completed its internal program for IPO preparedness."