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HomeMiddle EastDeal Professor: The Global Stakes of a Saudi Aramco I.P.O.

Deal Professor: The Global Stakes of a Saudi Aramco I.P.O.

Deal Professor


It’s hard to get one’s head around it: An initial public offering that would value a company in the trillions of dollars. That’s trillions, with a T.

Saudi Arabia is considering selling shares in its state oil company. With 261 billion barrels of oil in reserves and a yearly output of over three billion barrels of oil, the company, Saudi Aramco, is a behemoth by any measure.

It’s so big that the company’s valuation is estimated at $1 trillion to $2 trillion; some put the figure as high as $10 trillion.

A sale of a 5 percent stake would be the largest I.P.O. ever, with proceeds most likely approaching $100 billion. The investment banker fees may exceed $1 billion, which has prompted a feeding frenzy at this once-in-a-lifetime sale.

Even so, the real eye-opening development may not be the amount of money involved, but where the Saudi government chooses to list the shares.

If it decides to list only on the home country exchange, it will be a conservative choice with minimal impact. But if it seeks a listing in New York, London or Hong Kong, it could be revolutionary.

The choice matters so much because this can really be thought of as an I.P.O. of the whole country.

The oil company generated an estimated $180 billion in profit per year to the state, which represented over 40 percent of its economy, at least before the recent slump in oil prices. We don’t know the exact figures because they aren’t published, but we do know that about 90 percent of the Saudi government’s budget comes from oil profits. So Saudi Arabia is effectively Aramco, the company founded in 1933 by Standard Oil of California (now Chevron).

If Aramco lists only on the Saudi exchange, the I.P.O. will swamp the current market capitalization of the exchange, which is $300 billion to $400 billion, and dominate trading. In this environment where the company is the dominant one and is a creature of the state, Aramco can set its own rules on disclosure and other regulation, providing little comfort to foreign shareholders.

But the latest indications are there will be a global listing in New York, Hong Kong and London.

If Aramco goes to New York, it will be subjecting itself to the full array of United States securities laws applicable to foreign companies. This will require extensive disclosure and will subject the company to the scrutiny of the public market.

It would also mean that American investors, both big and small, could easily invest. A New York listing would be a way of bringing the company — and by implication, the country — into the full financial sphere.

This may be why the Saudis are considering such a move. The kingdom knows that its century’s worth of oil reserves may very likely never be used as the world shifts to greener, carbon-free energy. So it is selling now to reap some money while the going is good. Moreover, given the state of the Saudi budget and its current budget deficit — $98 billion last year — a successful I.P.O. will help ease local economic woes.

A New York Times editorial said “buyer beware” about an I.P.O., citing the state of oil and the Saudi kingdom. Indeed, the stock sale is no panacea and will not radically change what is, by all measures, a repressive regime.

Nonetheless, an offering is a step in transitioning the kingdom toward a more sustainable and more open post-oil economy.

Having Aramco subject to United States financial reporting will itself be something of a shock to the Saudi system. It would be as if an entire country suddenly became listed and regulated by outside capital markets.

That New York is even being considered for the offering highlights the continued strength of American capital markets in the years after the financial crisis.

When issuers choose to list abroad these days, for the most part they go to New York. The only other real competitor is London. And when these global I.P.O.s happen, it is American banks that largely organize them. In this case, the lead adviser for Aramco is JPMorgan Chase, which has worked with the kingdom for decades. It stands first in line for what could be more than $1 billion in fees.

This is a remarkable turn of events. After the Sarbanes-Oxley Act was enacted in 2002, there was a loud outcry that the United States was losing its stock listings.

Yet foreign listings have remained robust. In 2014 and 2015, they accounted for 22 percent and 18 percent of all I.P.O.s in the United States, according to Jay Ritter, a professor at the University of Florida.

And these were listings by prominent companies like Alibaba, Manchester United and Ferrari.

Hong Kong and Singapore, at the same time, have not drawn foreign I.P.O.s in any significant measure. Last year, Singapore had four.

This is where it gets interesting for the Aramco I.P.O. If it does decide to list to the United States, a difficult task awaits. Audited financial statements for a public company would need to be prepared, work that could take years. Aramco would have to decide which assets to keep and which would remain private.

The state’s control will have to be formalized, including whether the offering will include an interest in the kingdom’s oil reserves or be confined to other assets.

Aramco, which is generally regarded as well run for a state enterprise, will have to adopt a board that may have outside members and to prepare for the criticism of the market. Some trimming of fat will also be needed. In recent years, the company has invested far afield in chemical and solar assets.

Because of this, I am skeptical that an I.P.O. will happen soon. But I am also optimistic that if it does, and it goes to list in New York or London or Hong Kong, this can be a game changer for a country that is seeking to diversify its economy. (And yes, like all emerging market offerings, this is a risky one — perhaps even more so given the state of the Middle East and world oil — so retail buyers should beware.)

I may be overstating the potential for Saudi Arabia, which is still very much a closed regime and will probably remain one for some time. But the attraction of the United States stock market — and the disclosures and changes the Saudis would have to make to take part — show the transformative power of global capital. An Aramco I.P.O. could be a victory for New York.

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(via NY Times)