How Aramco’s huge IPO fell short of a Saudi prince’s wish
13th December 2019
Resources Rising Stars
Early on October 15, a group of international investment bankers delivered some unwelcome news to top executives of Saudi Arabia's giant oil company, Saudi Aramco (reports The New York Times).
The bankers, gathered at Aramco's headquarters in Dhahran, reported that global investors weren't as bullish on the company's initial public offering of stock as the officials had expected, said two people who were in the room and three who were briefed on the meeting. That meant Aramco appeared unlikely to reach the $US2 trillion ($2.9 trillion) valuation wanted by Saudi Arabia's crown prince, Mohammed bin Salman.
Instead, a banker from JPMorgan Chase, presenting on behalf of the group, explained that investors viewed Aramco as worth $1.1 trillion to $1.7 trillion.
Aramco executives, who hadn't seen the news coming, were angry. Saudi Arabia was counting on the IPO to attract foreign investment to help diversify its economy away from oil.
On Thursday, Saudi Aramco priced the IPO at 32 riyals, or $8.53, a share, valuing the company at $1.7 trillion. The offering is expected to raise $25.6 billion – a fraction of the $100 billion that Crown Prince Mohammed originally imagined. The company's shares are set to begin trading on Wednesday on Saudi's stock exchange, known as the Tadawul.
The result was not what Saudi officials had in mind. Rather than being listed in New York or London, shares of Aramco are being sold primarily to investors in Saudi Arabia and in neighbouring countries.
"The Aramco IPO was meant to be Saudi Arabia's debut ball to global investors," said Karen Young, a resident scholar at the American Enterprise Institute. "Instead, it will be more of a family reunion."
According to interviews with a dozen underwriters, strategists and others briefed on the IPO, who spoke on the condition of anonymity, Aramco's journey from private to public company was an unwieldy and at times fractious deal-making process. It involved 25 banks, three financial advisers, numerous Aramco company officials, at least two Saudi government committees and the crown prince himself.
The idea to sell shares in state-owned Aramco, the world's most profitable company, which for decades has been an engine of the Saudi economy, was foundational to the crown prince's Vision 2030 plan to modernise that economy. Released in 2016, that blueprint helped vault Mohammed, then the deputy crown prince, to become the heir apparent to his father, King Salman. JPMorgan, Morgan Stanley and HSBC were brought in to start the long process of preparing the company for sale to public investors.
Many of the banks said they envisioned situations where the company could be worth $2 trillion or more, said four people who attended the meeting, another three who were briefed on it and documents reviewed by The New York Times. Bank of America's estimates reached $2.5 trillion on the high end, these people added; JPMorgan's drifted as low as $1.4 trillion, according to the documents and two people with knowledge of their presentation.
Around the same time, the crown prince installed Yasir al-Rumayyan, a close confidant who favoured the $2 trillion valuation, as Aramco chairman, replacing Khalid al-Falih, a former Aramco chief executive with an engineering background.
Then on September 14, on its path to going public, Aramco was jarred by an aerial attack on its production facilities, blamed on Iran, that temporarily cut its oil output in half. The attack underscored the risk of operating in the Middle East, but it did not deter the march to an IPO.
Dealmakers soon fanned out over Asia, Europe and North America to gauge interest in Aramco by Fidelity Investments, Capital Group, BlackRock and other major investors. To make Aramco more attractive, the banks persuaded it to establish an enormous investor dividend, or annual payout – $75 billion a year.
But in meetings with roughly 80 mutual funds, hedge funds and sovereign wealth funds, underwriters and investors said, potential buyers baulked at the $2 trillion valuation, which struck them as too high relative to other major oil companies and in light of low oil prices, climate-change concerns and other geopolitical pressures.
Then came the meeting on October 15 at Aramco's headquarters in Dhahran on the kingdom's Persian Gulf coast, and one that would follow the next day. Of all the crucial moments in the lead-up to the IPO, these gatherings may have been the most tense, according to four people who either attended the meetings or were briefed afterwards. It was then that some of the bankers – motivated by the promise of enormous fees for evaluating the oil company's investment potential and then selling shares to respected investors – clashed with kingdom officials and other advisers who were fixating on an increasingly elusive $2 trillion deal.
The banks, who had been sizing up demand for the IPO, delivered their findings to Amin H. Nasser, Aramco's chief executive. Nasser was angry and taken aback by the news, said two people who were in the room and three others briefed on it later.
Al-Rumayyan was also deeply unhappy. During the JPMorgan group's presentation, according to four people with knowledge of the meeting, he criticised them for talking the valuation down.
By the next day, October 16, when the banking syndicate met to regroup, two camps had emerged: Citigroup, Goldman Sachs and Bank of America said that until they could share additional research on Aramco's finances and hold more detailed conversations with potential buyers, they could not determine what price investors would truly be willing to pay, said three people who were part of the discussion and three who were briefed on it later.
Bankers from Morgan Stanley and JPMorgan, who had been working on the deal for years, were sceptical that investors would be willing to pay much more than they were already suggesting. The bankers argued that Saudi officials in charge of the IPO should be given more details on why investors were cooler to the deal than expected.
Underscoring that point, said three people who were there, was Franck Petitgas, head of Morgan Stanley's international division, who asked how the underwriters could, in good conscience, not share the dozens of investor comments the bankers received in their initial meetings.
The banks talked with investors, but their prices didn't fundamentally change; at meetings held on November 15-16 with al-Rumayyan in Riyadh, banks reported that foreign investors were still valuing Aramco somewhere between $1.3 trillion and $1.8 trillion, according to two people who were there.
Faced with that, the kingdom abruptly cancelled a series of more formal investor meetings in Asia, Europe and North America. It relegated most of the US banks to lesser roles and refocused on the plans for a domestic listing.
In the run-up to the IPO, interest in Aramco shares in Saudi Arabia appeared strong, buoyed by a substantial marketing campaign and low-interest-rate loans for stock purchases.
Hussam A. al-Saleh, a financial adviser based in Riyadh, predicted last month that most of his Saudi clients would wind up buying shares. Some of the interest stemmed from Aramco's reputation in the kingdom as a classic stock, he said: "People believe in the company."
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