Bankers Due to Deliver Crucial Aramco Valuation as Soon as Friday
October 10 2019 - 12:06PM
Dow Jones News
By Ben Dummett and Summer Said
Saudi Arabian Oil Co.'s investment bankers could deliver, as
soon as Friday, their final recommendations on the valuation of the
state-owned energy giant in an initial public offering, with the
headline number expected to fall well short of the $2 trillion
targeted by Saudi Arabia's Crown Prince Mohammed bin Salman,
according to people familiar with the matter.
The crown prince has indicated he wants the IPO to value Saudi
Arabian Oil, or Aramco, at $2 trillion. But that target has already
met some resistance from company executives working on the planned
offering, who have suggested $1.5 trillion is more realistic. That
valuation is gaining support among the underwriters who are tasked
with drumming up investor interest for the offering, a group that
includes JPMorgan Chase & Co. , Goldman Sachs Group Inc. and
Morgan Stanley among others, according to people familiar with the
matter.
Aramco had no immediate comment in response to emailed
questions.
Aramco is in the final stages of preparing to list shares on the
domestic Tadawul exchange, as the government pursues a key part of
the crown prince's economic-reform program. MBS, as the crown
prince is known, ultimately plans to list at least 5% of Aramco,
through a domestic and a later planned international listing, to
raise billions of dollars to diversify Saudi Arabia's economy from
its dependence on oil.
The challenge for Aramco and MBS is settling on a valuation that
attracts sufficient investor demand to ensure enough money is
raised for the crown prince to fund his ambitious economic
diversification plans.
The offering's lead bank underwriters are slated to earn
unusually low fees for their work, according to the people. That
underscores the banks' bet that working on the Aramco IPO will
generate additional future business as a result of Saudi Arabia's
continuing diversification efforts. Typically in Europe and the
U.S. IPOs can yield fees of 2.5% to as much as 7% of the proceeds
raised from the issue.
It's not clear if MBS would pursue the IPO if Armaco couldn't
achieve a $2 trillion valuation. However, the IPO was previously
delayed from its original launch date of 2018 due to questions over
the valuation and venue for the international listing. At that
time, valuations for the offering ranged from $1.3 trillion to $1.7
trillion, according to a person familiar with the matter.
Initially, Aramco is aiming to sell a 1% to 2% stake in an IPO
this year and list the shares on the Tadawul exchange. It's aiming
to complete the issue before the U.S. Thanksgiving holiday on Nov.
28, according to some of the people familiar with the matter. Ahead
of that target, Armaco officials and its advisers would spend two
weeks educating potential investors on the company starting by the
end of October followed by a two-week book-building process,
according to one of the people familiar with the matter.
Achieving an acceptable valuation for MBS isn't the only
potential stumbling block that could get in the way of Aramco's
planned IPO. The company could face challenges from at least some
investors who are choosing to avoid fossil fuel investments in
favor of investments deemed more environmentally friendly. That's
the reason Singapore's Temasek Holdings has decided against
investing in the IPO, according to another person familiar with the
matter. It has also received a lukewarm response from the Abu Dhabi
Investment Authority, according to another person familiar with the
matter.
Further, some large investors aren't yet set up to trade in
Saudi Arabia, which could also undermine potential interest in the
offering, one of the people familiar with the matter said.
That said, the Saudi government is expected to require members
of some of the country's elite, who had been arrested for alleged
bribery in 2017 and held in Riyadh's Ritz-Carlton luxury hotel
until late last year and in some cases into early 2019, to buy
"large stakes" of the offering to help ensure the IPO's success,
according to some of the people.
Sarah McFarlane contributed to this article.
(END) Dow Jones Newswires
October 10, 2019 11:51 ET (15:51 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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