Saudi Aramco IPO set to be world’s biggest at $1.7 trillion

With Saudi oil giant Saudi Aramco putting its IPO valued at $1.7 trillion, below the $2 trillion mark sought by Saudi’s crown prince Mohammad bin Salman, it is set to become the world’s biggest Initial Public Offering.

Aramco will not be selling its shares directly to U.S. investors as well as in other markets, since the IPO will be restricted to Saudis and to those foreign institutions permitted to invest in the kingdom’s stock market.

In a statement, Saudi Aramco said, it plans on selling 1.5% of the company, equivalent to around 3 billion shares, at an indicative price range of 30 riyals to 32 riyals, which values the IPO at $25.6 billion (96 billion riyals) and giving it a potential market value of between $1.6 trillion and $1.7 trillion.

The Saudi Aramco IPO is likely to beat China’s Alibaba’s record $25 billion market debut in 2014 at the New York stock exchange. In fact, Aramco’s IPO size could potentially grow significantly bigger if there is enough demand for it to use a 15% “greenshoe” over-allotment option.

“We are planning to subscribe to the IPO in two funds that we manage,” said Zachary Cefaratti, chief executive officer of Dubai-based Dalma Capital Management Ltd, while adding that the preliminary valuation was “in line with our expectations”.

Through the IPO, Saudi Crown Prince Mohammed bin Salman, who floated the idea nearly four years ago, is seeking to raise billions of dollars in order to invest in non-oil industries, in efforts aimed at diversifying its oil-based economy.

Incidentally, in its original prospectus, that was published on November 9, Aramco had said the domestic IPO would be made to institutional investors outside the United States as per Regulation S of the United States Securities Act of 1933, and inside the United States under the Rule 144A of the U.S. Securities Act. However on Sunday, Saudi Aramco added an addendum to the IPO prospectus saying it had removed any reference to such regulations, which according to three sources familiar with the matter at hand, suggests that there would not be any international roadshows to market the shares.

“I expect this is a reflection of poor international demand,” said Rory Fyfe, managing director at MENA Advisors.

“It was not worth it from their view. If there’s no substantial value or demand why do it and take additional legal risk?,” said a banker familiar with the matter.

Incidentally, Aramco is yet to name any cornerstone investors in the deal as well as formally disclose the listing date.

The lack of demand for Saudi Aramco’s shares should be seen in the context of an expected drop in oil prices as well as a slowdown in demand for oil from 2025 with governments adopting measures to cut greenhouse gas emissions and a change in consumer behavior with regard to their mobility options.

This is despite the fact that Aramco is the world’s most profitable company with a planned dividend of $75 billion in 2020, which is more than five times bigger than Apple’s dividend, the biggest of any S&P 500 company.

Investors are also wary of taking of political risk surrounding the IPO, since the Saudi government, which relies on Aramco for the bulk of its funding, will continue to control the company.

Twenty seven banks are working on the deal, including Citigroup, HSBC, Goldman Sachs, Morgan Stanley and JPMorgan.

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