November 17, 2019 / 3:25 PM / 21 days ago

Breakingviews - Aramco’s $1.7 trln price tag pleases almost no one

Members of media chat before the start of a press conference by Aramco at the Plaza Conference Center in Dhahran, Saudi Arabia November 3, 2019.

LONDON (Reuters Breakingviews) - Saudi Aramco has gone for a suboptimal compromise. The long-awaited price range for its massive initial public offering, unveiled on Sunday, confirmed what everyone already knew: The Saudi Arabian oil giant is not worth the $2 trillion the kingdom originally sought. But even at a valuation of $1.6 trillion to $1.7 trillion it may still be too pricey for foreign investors.

Valuing Aramco shares at between 30 riyals and 32 riyals ($8-$8.5) is a step forward. The narrow range implies a high level of confidence in demand for the offering, which will give Saudi’s Public Investment Fund around $25 billion to help diversify the kingdom’s economy away from oil. Crown Prince Mohammed bin Salman’s willingness to accept a valuation below his preferred target shows an unusual capacity for compromise.

Even so, no one is getting what they want. The crown prince’s reputation for bending markets to his will suffers a dent. International institutions, meanwhile, would have preferred a valuation between $1.2 trillion and $1.3 trillion. At that level Aramco shares would yield about 6%, based on the company’s promise to pay annual dividends worth at least $75 billion for the next five years. That is in line with the average yield offered by other listed oil giants. The expectation that most foreign investors will pass helps explain why Saudi is offering only 1.5% of the shares, rather than 2% or even 3%.

Despite prioritising valuation over foreign appeal, Riyadh should still raise as much or slightly more than Alibaba’s record $25 billion offering in 2014 - a massive sum given its tiny domestic stock market. Some non-Saudi investors could still take part, and overseas funds which track emerging market indexes will be compelled to buy after Aramco starts trading. If oil prices stay elevated, retail investors who snap up 0.5% of the company, with the help of loans from local banks, will have been motivated by more than national pride.

Still, the IPO was also supposed to open Saudi capital markets, revive meagre foreign direct investment and help power diversification. A lower price tag might have enabled a bigger offering, and attracted greater interest from blue-chip global institutions to offset concerns about peak oil demand - not to mention Saudi’s woeful human rights record. Aramco’s compromise means those goals could remain unfulfilled.

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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