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Sabena Siddiqui

Saudi Aramco IPO fails to attract Western investors

Saudi Aramco's market value soared above $2 trillion on its second day of trading [Getty]

Date of publication: 17 December, 2019

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The sale of the largest oil company in the world did not create waves, and globally it got a very lacklustre reception, much to Riyadh's surprise.

As the world's most profitable company, Saudi Aramco has often been called the crown jewel of the Saudi economy. But when the initial public offering (IPO) of Saudi Aramco took place in November, 2019, it did not attract a lot of Western investors once the shares were floated on the market. Instead, the sale went through with investment from domestic buyers in the kingdom.

Counting on the IPO to bring in massive foreign investment and help in diversifying the Saudi economy away from oil, it was a setback for Riyadh and put its economic policies and plans in disarray.

Failing to achieve the target price of $2 trillion, the IPO could not revive the kingdom's economy and Saudi Vision 2030 was at stake.

In recent months, the Saudi government had made efforts to improve relations with Qatar and tried to sort out its differences with Iran before going ahead with the Aramco IPO. Even then, the sale of the largest oil company in the world did not create waves, and globally it got a very lacklustre reception, much to Riyadh's surprise.

Aiming to sell nearly three billion shares, it was to be the biggest initial public offering in history and preparations for the company's sale began in 2016 with major banks like JPMorgan, Morgan Stanley and HSBC brought in to start the process. So how did things come to such a pass that the much talked about IPO got ignored by global markets?

Firstly, the main drawback for potential investors was the security, environment and regional geopolitics of the region. Before the missile attacks on Saudi Aramco oil assets, Western banks had tended to value the IPO at even more than $2 trillion.

In 2017, even the US President had promoted the IPO, tweeting that, "Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange." 

After the missile attack on Saudi oil assets in September, the Middle East ended up with the image of a very risky region for investors.

After the missile attack on Saudi oil assets in September, the Middle East ended up with the image of a very risky region for investors

Secondly, some surveys by international asset managers had already concluded that the offering was over-valued by up to one third, around 35 percent. According to information given to Reuters, 26 major asset managers outside the Gulf region planned to stay away even though they collectively managed more than $7 trillion. However, some of these managers intended to buy the shares later but not participate in the IPO.

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Top international investment bankers had also informed main Saudi Aramco executives to keep expectations low regarding the IPO. Not expected to reach the announced valuation, Aramco IPO was believed to be worth $1.1 trillion to $1.7 trillion according to the group lead by a banker from JPMorgan Chase. And eventually, the IPO was finalised at $8.53 a share, valuing the company at $1.7 trillion.

In order to make it attractive enough for potential investors to ignore the geopolitical risks, some foreign banks had convinced the company to establish a sizeable annual payout of $75 billion a year by curbing spending plans but even this ploy did not work out and foreign buyers still felt it was over-valued at $2 trillion.

Thirdly, low oil prices and concerns over carbon emissions and a trend towards green energy has also influenced investors. As per the spokeswoman for Canadian investor Financiere des Professionels, which has a 2.15 percent stake in Saudi stocks due to its FDP Emerging Markets Equity Portfolio A fund, "Considering its core business and the impact of its contribution to global emissions, and following our responsible investment policy, we have no interest or plan to invest in Saudi Aramco."

Consequently, Riyadh felt it was futile to try and convince Western investors and started to activate its domestic market instead.

Read also: Saudi crown prince's message is clear: Kingdom is open for business, not for political activism

As foreign investors tentatively valued the IPO between $1.3 trillion to $1.8 trillion, Riyadh focused on a domestic listing and cancelled all formal investor meetings in Asia, Europe and North America.

International banks hired to under write the deal took on secondary roles and the share sales were looked after by two Saudi banks and HSBC. Slick marketing ensured investor interest and low interest rate loans were also offered for stock purchases.

Delaying the IPO for a while, Aramco finally went public on November 3. Some efforts were still made to interest the Abu Dhabi Investment Authority in the sale as well as Kuwait and Singapore. Pulling some weight in the region, fund managers from the Middle East and North Africa have invested in Aramco shares even though it offered less dividend than other oil companies.

Traded on the Saudi stock exchange, Tadawul instead of being listed in New York or London, Aramco shares ended up having Saudi investors in majority. But as the shares achieved the high end of the range – when the final price was finally set on December 5, early investors ended up having over paid by nearly 35 percent.

As Karen Young from the American Enterprise Institute aptly remarked, "The Aramco IPO was meant to be Saudi Arabia's debut ball to global investors. Instead, it will be more of a family reunion."

Then suddenly, in the second week of December, Saudi Aramco's value soared above $2 trillion and its share price surged on the its second day of trading. Hitting Riyadh's original evaluation, the news has been received with great jubilation. After crossing the $2 trillion valuation mark several times, the second day's takings ended with it reaching $1.96 trillion.

Nevertheless, the West seems unconvinced and it is unlikely that most foreign investors would take renewed interest. According to the London-based consultancy firm, Capital Economics, "This rally is unlikely to be sustained, indeed, reports suggest that the authorities pressured local investors and wealthy families to purchase shares on the secondary market to ensure that the debut didn't fall flat."

Even though the IPO is creating world records right now, the ground realities remain the same plus the volatility of the region has degraded its chances of sustainability.


Sabena Siddiqui is a foreign affairs journalist, lawyer and geopolitical analyst specialising in modern China, the Belt and Road Initiative, Middle East and South Asia. 

Follow her on Twitter: @sabena_siddiqi

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