One week into Saudi Aramco’s mammoth initial public offering and the likely shape of the deal is already emerging.
Investors with political or strategic reasons to buy the stock are in, while many international money managers seem ready to pass – at least until Crown Prince Mohammed bin Salman decides to rein in his valuation ambitions still further.
The richest Saudis are being pressed to commit large sums to the IPO. Among those considering sizable purchases are the Olayan family and Prince Alwaleed bin Talal, the billionaire investor who was held for several weeks in Riyadh’s Ritz-Carlton Hotel during the 2017 crackdown on corruption.
China, the world’s largest oil importer, may commit as much as $10 billion through sovereign wealth funds and other state-owned enterprises, according to people familiar with the situation.
An investment would be a hedge against rising oil prices and chime with the objectives of Beijing’s ambitious Belt and Road program.
But fund managers remain skeptical even after the Saudi government dropped their target valuation from $2 trillion to about $1.7 trillion.
There’s a lot at stake for Prince Mohammed, Saudi Arabia’s de facto ruler, and his Vision 2030 plan to overhaul the Saudi economy. He proposed the offering in 2016 as a way to expose the state-owned giant to the rigors of the market and raise money for the sovereign wealth fund.
But he quickly boxed himself in by claiming a $2 trillion valuation for the company – a number based on comparing the kingdom’s enormous oil reserves with those held by large international oil companies like Exxon Mobil Corp.
Analysts have consistently challenged his calculation, saying metrics like cash flow and dividend yield are more relevant.
“MBS will be acutely aware that focusing solely on valuation risks damaging the symbolic value of the IPO,” Torbjorn Soltveldt, principal analyst for the Middle East and North Africa at Verisk Maplecroft, said in a note.
“Putting pressure on wealthy Saudi nationals to act as cornerstone investors to boost Aramco’s valuation will only reinforce concerns about governance.”
Fund managers are concerned the Saudi government – which may sell only about 2% of Aramco – won’t give enough say to minority shareholders. Regional geopolitical risks, underscored when the company’s facilities were struck by missiles and drones in September, are also weighing on investors’ calculations.
“In terms of scale and quality of Aramco’s assets, they’ve got the world’s best, bar none,” said Dwight Anderson, the founder of hedge fund Ospraie Management. “But the decisions that they make are optimized to achieve the country’s objectives, not yours as an individual shareholder.”
Aramco will publish an initial version of the IPO’s prospectus on Saturday, giving investors greater details on the company’s structure, finances and strategy. A price range will be set on November 17th, kicking off a formal investor road show.
Saudi Arabia is turning to rich local families as it seeks to shore up demand for the record-breaking share sale.
As well the Olayans and Alwaleed, Aramco representatives have been seeking an investment from the Almajdouie family, whose businesses range from distributing Hyundai Motor Co. vehicles in the kingdom to a large logistics operation, according to people familiar with the matter.
They have also approached members of the Al-Turki clan, who are involved in fields from real estate to general trading, food distribution and ports, the people said, asking not to be identified discussing private conversations.
In China, the Beijing-based Silk Road Fund is among parties that have been in discussions to buy stock in the offering, according to people familiar with the matter. State-owned oil producer Sinopec Group and sovereign wealth fund China Investment Corp. have also held talks in recent months about investing.
Large commitments from China would help Aramco make the share sale a success after Western money managers pushed back earlier on the company’s valuation.
Money managers including AllianceBernstein and Frankfurt-based Union Investment Privatfonds believe the energy giant is worth less than the figure of about $1.7 trillion that the prince is now said to be willing to accept.
“If Aramco decides to significantly lower its overambitious valuation expectations and float the company on investor-friendly terms, these will be considered a sign of strength and wisdom rather than weakness,” said Slava Breusov, a senior analyst with the emerging and frontier equities team at AllianceBernstein, which manages almost $600 billion.
– With assistance from Kelly Gilblom and Selcuk Gokoluk.