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Saudi crown prince gives green light for Aramco IPO

Bloomberg logoBloomberg 11/1/2019 Javier Blas, Matthew Martin and Dinesh Nair
a man standing next to a car: Mohammed bin Salman© Bloomberg Mohammed bin Salman

Saudi Crown Prince Mohammed bin Salman finally gave the go-ahead for the initial public offering of state oil producer Aramco, deciding there’s enough support from local investors for what could be a record share sale, according to people familiar with the situation.

The crown prince made the decision at a meeting he chaired on Friday and an announcement is likely as soon as Sunday, the people said, asking not to be named before an official statement.

First suggested by Prince Mohammed in 2016, the IPO was delayed several times as international investors balked at the $2 trillion valuation he placed on the company. An earlier plan to kick off the share sale in mid-October was shelved after bankers received lukewarm interest from money managers, and the deal will likely rely heavily on Saudi money. It’s not clear if the prince is willing to accept a lower valuation.

Aramco, which pumps about 10% of the world’s oil, generated the most profit of any corporation last year with net income of $111 billion -- more than Apple Inc., Google’s parent Alphabet Inc. and Exxon Mobil Corp. combined.

The sale is key to Prince Mohammed’s Vision 2030 plan to overhaul the Saudi economy and end the kingdom’s reliance on oil exports. The proceeds from the IPO will boost the firepower of the OPEC nation’s sovereign wealth fund, which already has investments in funds managed by Blackstone Group LP and SoftBank Group Corp.

Grabbing a role in the deal has been one of the most hotly contested mandates for global banks. More than 20 are working on the deal, with the top roles going to firms including Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co.

Related video: China vying for a piece of IPO, sources say (provided by Fox Business)

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But the path to today’s decision hasn’t been smooth. After investors pushed back on the Prince Mohammed’s $2 trillion valuation, the original plan to list Aramco in either New York or London was dropped in favor of a Riyadh-only flotation.

To get the deal done, Aramco’s bankers will need hefty contributions from the kingdom’s wealthiest families, many of whom have already been targeted in 2017’s corruption crackdown that saw scores of rich Saudis detained in Riyadh’s Ritz-Carlton Hotel. Authorities said they raised over $100 billion in settlements from people accused of graft.

Local asset managers, including those looking after government funds, have also been asked to make significant contributions, while domestic banks have been told to lend generously so retail investors can buy Aramco shares, according to people familiar with the situation.

Aramco must also contend with the strengthening global movement against climate change that’s targeted the world’s largest oil and gas companies. Many fund managers are concerned the shift away from the international combustion engine -- a technology that drove a century of steadily rising demand -- means consumption of oil will peak in the next two decades.

Aramco could be listed before the end of the year, in which case the world’s most valuable company will no longer be traded in the U.S. but on the Saudi bourse. The exchange lifted restrictions on foreign investors four years ago.

In a bid to make the stock more attractive, Aramco plans to pay $75 billion in dividends next year. That would give investors a yield of 3.75% if the company achieves its ambition of a $2 trillion valuation. That’s a decent payout in a low-interest-rate world, but it’s a lower dividend yield than at other big oil firms.

Investors who buy into the IPO have been guaranteed that the dividend won’t fall until after 2024, regardless of what happens to oil prices. Instead, Aramco will cut back on payouts to the government if it has to reduce the total dividend to less than $75 billion.

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