By Tim Falconer
Here’s the thing about an initial public offering, (IPO), you generally only get one chance to get it right. And when there is so much riding on a single share sale, as is the case with Saudi Aramco, getting it right the first time isn’t just an objective, it’s a nailed on necessity.
Amid all the noise and hype surrounding the Aramco IPO, recent media reports have suggested that plans for the eagerly awaited share sale have been slowed by internal disagreements over where to list the company. The Wall Street Journal has also reported growing levels of frustration amongst bankers involved in the deal at the slow pace of decision-making regarding a venue for the listing, a key step in the IPO process.
Complications in preparing the state-owned oil company for what will be the biggest IPO in history does raise some concerns about the probability of such a transaction happening in 2018.
In normal circumstances, any news of a potential delay would rankle potential investors and market observers. But in Saudi Aramco’s case, there’s just too much at stake for the share sale to fail. And if that means coming to the market later than expected just to get it right, then so be it. A gradual approach is exactly the right one in Aramco’s case.
Making sure the share sale of the century gets away successfully should be of paramount importance to the Kingdom. Not only is there a significant financial windfall attached to the IPO, but Aramco’s listing could potentially double Saudi’s representation in the MSCI Emerging Market Index, should the Kingdom’s stock market eventually get the nod from the index provider. With hundreds of billions of dollars in active and passively-managed money tracking it, MSCI’s EM Index is a significant dictator of where equity market money flows.
As it stands, London and New York are the locations currently favoured by Aramco. The likelihood of a New York Stock Exchange listing further boosted, no doubt, by the recent visit to Saudi Arabia by President Donald Trump as well as the kingdom’s close political ties to the U.S. In London, media reports there suggest that listing rules might be eased there to accommodate an Aramco listing. Given the sheer scale of the IPO, and the eye-watering fees connected to it, competition between the London and New York stock exchanges shouldn’t come as any surprise.
Beyond settling on a location for an Aramco listing, there is a sizeable halo effect for Middle East stock markets to consider. The regional investment landscape stands to gain significantly from the Aramco IPO. It is the kind of seismic deal that puts the Kingdom and the Middle East region right in the line of sight of international investors. The Middle East could quickly become a region that investors will find hard to ignore.
The Saudi government is pursuing the Aramco IPO as part of a broad plan to decrease its dependence on the oil industry and to raise funds to diversify its economy. If anything, many see it as a cornerstone to strengthen the Kingdom’s ambitious Vision 2030 plan, which is said to be the brainchild of the Deputy Crown Prince, Mohammed bin Salman.
If anything, much of Saudi’s recovery relies on the success of the country’s Vision 2030 plan, a blueprint for modernizing the economy that focuses on cutting the Kingdom’s dependence on oil, lowering government subsidies, and stimulating the private sector. Saudi’s transition promises to be a long journey, but an extremely valuable one in the eyes of investors.
The Kingdom seems adamant at steadily proceeding with its “economic restructuring” including its diversification of its energy and financial resources. It is said that Saudi Arabia, the world’s top hydrocarbon producer at the moment, is building one of the world’s largest solar-energy fields and enhancing its non-oil industrial sector. This means less dependency on oil revenues and cleaner energy sources for the Kingdom, adding welcome revenue to the treasury’s coffers.
Progress in Saudi Arabia is never a linear, or expeditious journey. Small, but significant steps are usually the way forward. The Kingdom’s current leadership appears to be favouring a slower, but ultimately more comprehensive process in getting the Aramco IPO away. Ultimately this might not be a bad thing either, especially if it delivers the desired results.
Tim Falconer is Partner & Managing Director, Dubai, at Bell Pottinger.