The Fake Aramco IPO

By Paolo von Schirach

WASHINGTON – There were great expectations about the Aramco IPO. It was announced long ago by Saudi authorities, and then postponed several times. Well, now we know why it took so long, and why in the end the IPO did not take place in New York or London. Indeed, the Saudi government, the sole owner of this energy giant, could not be sure about the response of savvy international investors. Would they really buy shares at a price that implies an overall $ 2 trillion valuation for Aramco? May be not. And so the Saudis decided to play it safe. They would do this at home, in an environment and with investors they could control. And so they used the Riyadh Tadawul stock exchange (where less than 200 stocks are traded) as the venue for this “historic” IPO.

Home made IPO

And, sure enough, the compliant, super wealthy Saudi elites bought the Aramco shares at the set price and bid up the stock so that Aramco would reach the $ 2 trillion valuation This choice of venue and how all this was arranged tells us that this is is no genuine IPO.

This is a (forced?) purchase, at a preset, dubious valuation of a very small number of Aramco shares by a few wealthy Saudis and some Saudi companies. Prince Mohammad Bin Sultan, MBS, the de facto ruler of Saudi Arabia, wanted the valuation of Aramco –no doubt the world’s largest energy conglomerate– to be at or close to $ 2 trillion. And so the shares had to be priced accordingly, and the compliant buyers –all of them Saudis– had to pay and sustain that price.

Not the real thing

Anyway, because of all this maneuvering, it is clear that this is not a genuine IPO in which the market eventually sets the value of the newly offered company based on available, scrutinized financial data and on their interpretation of market trends.

This IPO is a Saudi government gimmick aimed at getting essentially free cash in exchange for a tiny sliver of Aramco for which several compliant Saudi buyers paid a preset political (and therefore most likely inflated) price.

The risks involved in a real IPO

If Saudi Arabia had wanted to attract serious international buyers, it would have had to disclose a lot more, and then let the market decide what the value of Aramco really is. But this orthodox approach carried the risk of a lower overall valuation for Aramco after the IPO, had investors decided that the company, however enormous and certainly very valuable, is not worth $ 2 trillion. And this would have hurt the prestige of the Saudi Kingdom. For Saudi Arabia, Aramco is “it”. There is not much else in the Kingdom beyond oil and oil products.

Cognizant of these risks, MBS opted for a safe IPO. The offering took place at home, in Saudi Arabia, using the tiny Saudi stock exchange. The Saudi elites were persuaded (forced?) to buy the Aramco shares, so that the government could prove to the world that Aramco is the most valuable company on earth. In other words, this is about propaganda, and therefore the IPO is not serious.

What is Aramco’s true market value?

There is no doubt that Aramco is an energy giant. In fact, “the” energy giant. But, based on all we know about the company and most importantly about the future of global oil demand and oil prices in this new era of electric vehicles and carbon taxes, what is a fair valuation for Aramco? Is it close to to $ 2 trillion as the “local buyers only” IPO would suggest? Or is it less, perhaps half of that, as many analysts indicated? We did not know for sure before this IPO, and we still do not know today.

Clearly, executing a proper IPO in an internationally recognized exchange would have exposed the Saudi government to the scrutiny of international investors, and therefore a possible embarrassment, had investors decided that the shares were too expensive and consequently the touted $ 2 trillion pre IPO valuation excessive. In order to guarantee a “success” MBS engineered this “friends and family only” IPO.

Big questions about the Saudi reform agenda

That said, one thing is clear. If the manner in which this long delayed IPO took place is illustrative of the seriousness of MBS’ ambitious economic reform agenda for Saudi Arabia, I am not impressed; and consequently not very optimistic about the future success of MBS’ plans to diversify and grow the non-oil Saudi economy.