Saudi Aramco IPO: squeeze wheeze

Obstreperous foreign investors are unlikely to buy into a float at US$2 trillion. Photo / AP

Lex COMMENT

Markets have a reputation for encouraging inequality. But the price discovery mechanism is a great leveller, in its way.

Take Saudi Aramco, the world's largest oil company.

The Saudi government wants to list the group at a valuation of US$2 trillion ($3.1t). Many pundits — including Lex — have said that is too high. A scheme to prove them wrong looks doomed to failure.

Obstreperous foreign investors are unlikely to buy into a float at US$2t. Saudi Aramco hopes wealthy local families will be more accommodating. If these cornerstone investors buy and hold a small proportion of shares — which would be listed but illiquid on the Riyadh stock market — Saudi leaders could claim their overcooked estimate was right all along.

Wealthy Saudis might consider it wise to participate — some spent an enforced stay in a luxury hotel during a tax shakedown in 2017. But the ploy is a flawed one, for a couple of reasons.

First, it would not raise much money, at least by the gargantuan standards of the Saudi oil industry. The kingdom originally hoped to list 5 per cent of Saudi Aramco, totting up to US$100 billion, four times the size of a world-record fundraising from Alibaba five years ago.

Placing 3 per cent on the Riyadh market with local tycoons would require them to pony up US$60b.

Demanding any more from them after the confiscation of more than US$100b of their assets sounds like a stretch.

The second difficulty is that the much-delayed float is supposed to reduce Saudi Arabia's dependence on oil, whose value is slowly being eroded by climate change. That would require foreign investors to participate more meaningfully than anticipated. As soon as they did, the "down round" would slash the value of Saudi Aramco.

Saudi ruler Mohammed bin Salman has gilded himself into a corner. A quasi-private deal in Saudi Aramco would prove nothing, except that he has been obdurate and badly advised.

The market, which is indifferent to the pride of powerful men, has already humbled tech giants WeWork, Uber and SoftBank.

One way or another, the same fate awaits Saudi Aramco.

Sometimes it is better to admit you were wrong than to compound your error.

Lex is a premium daily commentary service from the Financial Times

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