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The big winners from an Aramco listing will be the bankers

 
Garry White
Opec has been capping oil production in an attempt to support oil prices ahead of the flotation of Saudi Aramco

Britain’s bankers and City advisors are very excited about the mooted flotation of Saudi Arabia’s state-owned oil company Aramco. The potential fees – and therefore bonuses – generated are likely to be astonishing. It will be trebles all round, as they say in Private Eye. However, as an investment proposition there may be less to cheer.


London has been courting the Saudis to try and convince them to list what could be the world’s largest company in the UK. A UK listing would also cement London’s position as a global financial centre amidst the uncertainty that is presented by the UK’s decision to leave the European Union, so members of the government such as Liam Fox are keen on making the flotation happen here.

Xavier Rolet, chief executive of the LSE, accompanied Prime Minister Theresa May on her trip to the kingdom in April last year and it is highly likely that Mohammed bin Salman, the anointed Saudi heir who visited the UK last week, was lobbied on this front too. The LSE has even suggested it could relax its listings rules to accommodate the IPO. The issue is that Aramco only wants to list 5% of its shares in London. This has led to organisations such as the UK Investment Association to argue that 25% should be the minimum free-float level, as is usually the case.

Why does it matter if a company just float 5%? Well, a public-listed company is one where shareholders can vote and have an influence on decisions made by the business. When 95% of the shares are held by a state agency, minority shareholders will effectively have no say in the way the business is run. Investors can also point to the case of miner Eurasian Natural Resources Corp (ENRC), which was allowed to list with less than 25% before collapsing and having to be taken private.

Tool of Saudi government

Also, under the proposed changes to listing requirements, sovereign shareholders that own significant stakes will no longer be considered “related parties”. This means that any deals that a premium listed company undertakes, such as buying from or selling state assets, will not be subjected to a vote by independent investors. The rulers of the Kingdom could potentially still be able to use the company as an agency of policy.


Because Aramco is so large, it could potentially be included in the FTSE 100, which would force many tracker funds and pensions to buy into the business which arguably has opaque corporate governance. Indeed, the Saudi royal family's total control of the kingdom’s oil wealth is the root of all of its power, influence, and success. Critics argue that minority investors are unlikely to have any influence on the company. However, the company is likely to be excluded from any index series should it float in London.

Until now, the Saudis have insisted that the listing will happen before the end of this year on the Saudi stock exchange, the Tadawul, with a secondary listed abroad. The listing is part of the country’s “Vision 2030” programme, which aims to diversify the country’s economy, boost overseas investment, reduce its dependency on oil and develop sectors including health, education, recreation and tourism. A target valuation of $2 trillion appears to be expected by the Saudis, although many expect this to be ambitious. Companies should be valued based on a fair and detailed assessment of its assets and prospects, not at a target level set by a government to ensure it raises enough cash. This morning, The Financial Times reported that “delays on IPO decision making came as advisers struggled to achieve the $2tn valuation that Prince Mohammed wants”.

Oil price wilts

If a listing happens, it will have to happen relatively soon. Opec has been trying to support the oil price with co-ordinated production cuts – a move that risks the long-term market share of Opec members. Shales production in the US is now soaring, with shipments to Asia from the US now accelerating. The longer that the Saudis corral Opec members into this situation the more likely it is that members will break their quotas and start producing more oil. The US is now pumping more than 10 million barrels a day of crude, beating a record set in 1970.

London’s main competitor for the Aramco listing is New York. However, there are concerns that a US listing poses the greatest litigation risk of any jurisdiction. This could potentially include any class action suit from families impacted by the September 11 terrorist atrocity at the World Trade Center and elsewhere, as 15 of the 19 attackers were Saudi nationals. However, there is also the potential to list on an Asian exchange such as Hong Kong, as demand growth for crude is likely to be higher in the region.

It is difficult to assess how an investment in Aramco for a private investor will do until we know the valuation. But the fact the Saudi government has a specific target might raise some alarm bells. Minority shareholders are likely to have little influence of the company and, looking at other state-owned oil companies that have listed, primarily Russian groups such as Gazprom, the performance has been lacklustre. Over the longer term, the oil price could also come under pressure from growth in supply caused by the rise of shale and the move towards cleaner technologies such as electric vehicles could hit demand.

The recent dip in the oil price means that Prime Mohammed is unlikely to get the arbitrary valuation he wants for the business and the country could wait for better market conditions. However, all of the above suggests that even if the company does list in London, investors need to think hard before joining the Saudis as a junior partner in a business over which they will have no control. The bankers and advisors, however, are likely to be big winners and remain the biggest cheerleaders for a London IPO.

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