August 22, 2018 / 8:01 PM / 3 months ago

Breakingviews - Aramco’s failed IPO is a beginning not an end

Oil tanks seen at the Saudi Aramco headquarters during a media tour at Damam city November 11, 2007. REUTERS/Ali Jarekji

DALLAS (Reuters Breakingviews) - The failure of Saudi Aramco’s $2 trillion initial public offering is more a beginning than an end. On Wednesday Reuters reported that Aramco had called off the deal – which had yet to officially launch – and disbanded its army of investment bankers. They’ve been spared the need to sell an overambitious deal to unwelcoming markets. But there are plenty more Saudi deals to be done that advisers will hope can be more easily executed.

Aramco’s problem wasn’t that investors don’t like oil producers, though Brent crude prices languishing a third below their 2014 level don’t help. The trouble was a $2 trillion valuation Crown Prince Mohammed bin Salman put on Aramco right from the get-go. Awkwardly for bankers at JPMorgan, Morgan Stanley, HSBC, Moelis and Evercore, the company may be worth some 25 percent less than the prince’s target, based on Breakingviews calculations.

But all is not lost. As well as putting Saudi on the global capital markets map, the IPO was meant to help line the coffers of the country’s Public Investment Fund. The state-owned oil company may instead acquire a stake in petrochemicals maker SABIC from the fund. And there maybe other, smaller experiments. Last week Tesla’s founder Elon Musk said that the PIF had enough money to take his company private. And then there is a $45 billion agreement to invest PIF money in SoftBank’s Vision Fund.

Aramco and Saudi can therefore still get financial consiglieri hopped up on the prospects of fees. The challenge for bankers is balancing their client’s demands with their assessment of what markets and investors will actually tolerate. After investing much time on Aramco, they could be more rigorous in asking whether future deals can actually get off the ground.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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