Where the Saudi Aramco IPO stands
The sale of shares in Saudi Arabia’s oil giant was supposed to underpin Crown Prince Mohammed bin Salman’s grand plan to transform an insular, oil-dependent kingdom into a 21st century economy. Floating Aramco abroad would expose the most important Saudi company to the scrutiny of global markets, a hard jolt toward the modern world.
So much for that.
Saudi Arabia’s acknowledgement this week that the initial public offering is on hold represents the most significant reversal in Prince Mohammed’s plans. While he will find other ways to fund his vision, it’s likely to give pause to investors considering other deals that depend on government commitments.
Saudi officials said again and again that the sale was “on track, on time” for the second half of 2018, before recently extending that timeline to next year. Rather than marking a watershed in one of the most ambitious economic projects in history, it now highlights the unpredictability of the country under a young leader who has centralized political power in his own hands since becoming de facto ruler a little over a year ago.
“It’s a psychological and symbolic blow, the latest in a string of public-relations disasters that doesn’t generate confidence,” said James M. Dorsey, a senior fellow at Nanyang Technological University in Singapore who studies the Middle East. “The prince was very good at creating expectations, but he has been unable to manage the process.”
Prince Mohammed, 32, revealed the Aramco plan in an interview with The Economist in January 2016 and officials hoped it would raise as much as US$100 billion. The IPO was at the center of Vision 2030, the blueprint for an economy based on technology, entrepreneurship and spectacular new infrastructure like the building of Neom, a high-tech city on the Red Sea coast.
Yet this year, it began to look less likely. Bloomberg Businessweek reported in July that the sale was drifting and even Aramco officials doubted it would ever see the light of day.
By then, the prospect of the world’s largest-ever IPO had become an important subject in Saudi Arabia's relations with its closest allies while the prince consolidated his power by cracking down on dissent at home and escalating the war in neighboring Yemen.
President Donald Trump personally lobbied Prince Mohammed in November 2017 to choose New York as the venue for the listing. Not to be outdone, U.K. Prime Minister Theresa May did the same on an official visit to Riyadh. Britain’s financial regulator offered to change its listing rules to accommodate a share sale by the company in London.
Meanwhile, dozens of international investment banks worked frenetically to win roles on the deal, both for the direct fees it would generate and out of hope that it would lead to further mandates in Saudi Arabia. All that work will now go on the shelf, and largely without compensation, since banks are typically paid only if deals are executed.
It’s not clear what, exactly, were the proximate causes for the deal being put on ice, but questions over valuation were key.
Prince Mohammed has said that Aramco should be valued overall at about $2 trillion, a figure some analysts judged as much too high based on what’s known about the company’s operations. Going public at a lower price might have represented a loss of face for the Saudis.
The government in Riyadh said it’s making progress in a complex process. Khalid al-Falih, the energy minister, said in a statement on Thursday the kingdom “remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum.”
Aramco isn’t planning to avoid international capital markets entirely. The company is weighing plans to sell bonds for the first time abroad in what could be the largest sale of corporate debt ever. The cash will largely fund an acquisition of a stake in Sabic, Saudi Arabia’s biggest petrochemicals group, for as much as US$70 billion.
The bond sale would give Saudi Arabia some of the financial payoff of an IPO, though without having to share ownership with international investors -- or revealing information the kingdom would rather keep private. It also shows the crown prince’s willingness to adapt to circumstances, said Hasnain Malik, global head of equity research and strategy at investment firm Exotix Capital in Dubai.
The delay to the Aramco sale “demonstrates not that there is a lack of commitment to reform but rather the ability to change course,” said Malik.
Saudi Arabia’s financial firepower will also remain in tact. The money from the Sabic sale will go to the country’s wealth fund, which will then have the capital to make further bets like the state’s nearly 5 per cent holding in electric-car producer Tesla Inc (TSLA.O).
The bond sale will enforce some transparency on Aramco. It will be required to publish a detailed prospectus of financial information, and issue periodic updates on its performance. It probably won’t, however, need to disclose detailed geological data on its oil reserves -- a critical pointer for the kingdom’s future finances and, potentially, economic and political stability.
Then there’s scrutiny of the bigger picture. There’s already evidence that investor confidence has been hit by recent events in Saudi Arabia. Foreign direct investment into the kingdom fell 81 per cent in 2017, according to the United Nations Conference on Trade and Development, compared with gains in neighboring Persian Gulf countries.
In attempting to open the economy, “the Saudis want to maximize revenue but with minimal political risks,” said Neil Partrick, a researcher who specializes in Saudi affairs. “The greater political risk, though, is that in the medium term they cannot resolve the contradictions of state economic and political control and hoped-for private sector growth.”
Prince Mohammed’s rule has been marked so far by tentative steps toward greater economic and social freedoms in one of the most conservative places on earth. Women can now get driving licences and cinemas have opened for the first time in decades.
But change has also come with a harsh suppression of opposition. Critical reforms have stalled including a plan to remove energy subsidies that encouraged Saudis to waste resources.
Hundreds of Saudi Arabia’s richest men were arrested last year and detained in Riyadh’s Ritz-Carlton hotel in what the government said was a purge of corruption. Some were forced to sign over their assets.
In recent months, women’s-rights activists have been imprisoned and prosecutors are currently seeking to behead Israa al-Ghomgam, who participated in anti-government protests in the eastern part of the country.
It’s also clear that Prince Mohammed will continue to ruffle feathers abroad. Saudi Arabia is enforcing a more than yearlong embargo against Qatar, even threatening to dig a canal on its border with the tiny peninsular state.
In August, the kingdom abruptly severed its political and economic ties to Canada in response to criticism of its imprisonment of human-rights activists. It forced the suspension of air links, diplomatic expulsions, and the withdrawal of Saudi students from Canadian universities.
Prince Mohammed “needs to do something that demonstrates leadership,” said Dorsey in Singapore. “Walking behind the cart isn't leadership. He needs to create the basis for the restoration of confidence, that he is in charge, that he can do this. Ultimately, he hasn't delivered yet.”