BUSINESS

Saudi Arabia cuts Saudi Aramco valuation, boosts loans to get IPO done

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Saudi Aramco will sell just 1.5 per cent of its shares on the local stock exchange, about half the amount that had been considered and seek a valuation of between $1.6 trillion and $1.71 trillion.
MONDAY 18, NOVEMBER 2019

Saudi Arabia set a valuation target for Saudi Aramco’s initial public offering (IPO) well below Crown Prince Mohammed bin Salman’s goal of $2 trillion and pared back the size of the sale to ensure the world’s largest oil producer successfully lists on Tadawul next month, reported Bloomberg.

The Saudi Arabia Monetary Authority also relaxed lending limits to boost demand from local investors after bankers were unable to convince many international money managers of the merits of the deal.

SAMA will allow smaller retail investors to borrow twice their cash investment, double the normal leverage limits the regulator allows for IPOs.

The Kingdom’s richest families are expected to make significant contributions to the IPO and will be allowed to borrow in either higher multiples to finance their purchases.

While Saudi Aramco would allow the state-owned company to overtake Apple as the world’s biggest public company by some distance, the plans are a long way from the Crown Prince’s initial aims—a local and international listing to raise as much as $100 billion for the Kingdom’s sovereign wealth fund.

At the lower end of the price range, the offer would fall short of a record, coming in just below the $25 billion raised by Alibaba Group Holding in 2014.

The lacklustre response from investors outside the Kingdom meant Saudi Aramco decided shares will not be marketed in the US and Canada as originally planned. Japan’s also off the list. But bankers working on the deal said they were confident that there was more than enough local demand to ensure the deal’s success at the proposed valuation.

The final version of the prospectus did not identify any cornerstone investors, though the company is still in talks with Middle Eastern, Chinese and Russian funds.

Foreign investors had always been sceptical of the $2 trillion target and recently suggested they would be interested at a valuation below $1.5 trillion. That would offer a return on their investment close to other leading oil and gas companies like Exxon Mobil and Royal Dutch Shell.

The new valuation implies Saudi Aramco, which has promised a dividend of at least $75 billion next year, will reward investors with a dividend yield of between 4.4 per cent and 4.7 per cent compared to Exxon Mobil’s five per cent and Shell’s 6.4 per cent.

Saudi Arabia has been pulling out all the stops to ensure the IPO is a success to a sceptical audience. It’s cut the tax rate for Aramco three times, promised the world’s largest dividend and offered bonus shares for retail investors who keep hold of the stock.

Saudi Aramco has also faced the challenge of the strengthening global movement against climate change that is targeted the world’s largest oil and gas companies. Many foreign investors are concerned about the shift away from the internal combustion engine—a technology that drove a century of steadily rising fossil fuel demand—means consumption of oil will peak in the next two decades.

Proceeds from the IPO will be transferred to the Public Investment Fund, which has been making a number of bold investments including $45 billion into SoftBank Group’s Vision Fund, a $3.5 billion stake in Uber Technologies and planning a $500 billion NEOM city.

TAGS: UBER TECHNOLOGIES SHELL APPLE EXXON MOBI IPO PUBLIC INVESTMENT FUND SAUDI ARAMCO SOFTBANK GROUP NEOM CITY SAUDI ARABIA MONETARY AUTHORITY CROWN PRINCE MOHAMMED BIN SALMAN
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