It must have been crown prince Mohamed bin Salman’s sweetest dream, but all it ultimately resulted in was a rude awakening. For the past 4 years, Salman thought he could bamboozle the international investor community into accepting a 2 trillion dollar valuation for his beloved Saudi Aramco enterprise, the Kingdom’s crown jewel of an asset. Now that the IPO is finally going ahead we have yet another example of public shareholders scoffing at lofty valuations imposed by private owners.
Not that the enterprise doesn’t have any goodies to show for. Saudi Aramco is a well-managed company considering it’s an oil and gas behemoth and a state energy monopoly. It has access to over 50 years of proven reserves and extracts oil more cheaply than any Western peers. Initially, the IPO was expected to raise 100 billion dollars, 4 times as much as it will likely produce now. The dream of beating every record in the capital market books has indeed collapsed.
When US investors rejected pricing considerations, the marketing efforts were grudgingly curtailed to mostly Europe. When a few days ago the European roadshow got cancelled, it became clear that the project was limited to the lowest common denominator of a domestic deal that pales in contrast to every ambition ever had. A mere 1.5% of the company, listed at the Tawadul stock exchange in Riyadh, will constitute the free float, comprised of 2/3 domestic institutions and 1/3 Saudi retail investors.
One wonders why it took 25 banks working on the listing and transact the sale. Their payday has also shrunk accordingly, and a less than 90 million dollar fee pot will have to be shared among them. At least they managed to collect enough institutional orders to actually pull off the IPO, according to Bloomberg’s commentary on Wednesday, and there are 2 more weeks of subscription period ahead. The royal family is allegedly pulling out all the stops and arm-twisting the richest Saudi families to invest.
In addition, the Saudi Arabian Monetary Authority has told banks that they extend double the leverage limits to domestic retail clients, ie they can lend money at a 2-to-1 ratio for every Riyal they will invest in Aramco. Desperate times apparently call for desperate measures. In other words, the retail allocation must work, or there is no deal after all. To save face, Salman needs to get a valuation closest possible to his coveted 2 trillion, even though the best he can hope for seems to be 1.7 trillion.
This IPO is no one’s feather in their hats. It will be lucky to be choked across the finishing line. In retrospect, the royal family probably bemoan that they embarked on the project in the first place. There had been various options on the table to do a strategic private deal carried mostly by Chinese and Russian institutions. But too much flattery around an all-time record-setting deal valuing Aramco at the gargantuan 2 trillion dollar threshold lured the Saudis into this adventure that turned into a damp squib.
