Opinion

Learning process all around as Saudi Aramco prepares for market

Learning process all around as Saudi Aramco prepares for market

Author

There was talk at Saudi Aramco’s initial public offering (IPO) presentation in Dhahran on Sunday of the need to “educate” people about the forthcoming share sale, and it is true that such a massive financial transaction is complex and cloaked in terminology not immediately familiar to all.

Domestic Saudi investors, some of whom will be buying shares for the first time, will have to learn a whole new vocabulary: Equity, dividend, puts and calls, margin trades, shorts and longs, and the like. It can be a complicated and confusing process, but most sensible people will get the gist of it pretty quickly.

In the UK in the 1980s (at the height of the privatization bonanza under then-Prime Minister Margaret Thatcher, when many state-owned companies were sold off) a new breed of streetwise share traders emerged virtually overnight. There is no reason the same cannot happen now in Saudi Arabia.

The second job of education is for international investors, some of whom have never before thought of investing in the region, but for whom the lure of the world’s most profitable company will be too great to resist. This might be more difficult.

For some Western investors, the perception gap is significant. For example, some potential investors in the IPO a couple of weeks ago were under the misapprehension that the attacks on oil facilities would produce a serious financial hit that might change their minds about an investment in the offer at all.

Saudi domestic investors will be on a steep learning curve, not just in terms of the language of share dealing, but also in the basic philosophy.

Frank Kane

They were reassured at the highest level that this was not the case, but insisted on hard financial fact. They got it on Sunday with the publication of the figures for the first nine months of this year: Net income of $68 billion, free cash flow of $59 billion and “no material impact” on Aramco’s finances.

There is probably a job of schooling to do on dividend policy as well. Yes, Aramco really does mean it when it says that it will pay a minimum of $75 billion in total, and that those who take up shares in the IPO will get priority ahead of the government (which will remain the biggest shareholder by far) when it comes to dividend payouts.


READ MORE: Saudi Aramco IPO termed a 'unique investment proposition'


The total valuation of Aramco in the IPO will be a subject where each side (share vendor and share purchaser) will have to learn a little from the other. There does seem to be some serious objection on fundamentals to the $2 trillion figure that emerged early on before IPO technicalities had been properly analyzed in light of global markets and energy economics. Much has changed since 2016 in the oil markets.

Finally, Saudi domestic investors will be on a steep learning curve, not just in terms of the language of share dealing, but also in the basic philosophy. Equity ownership is not a day at the races. It is a participatory privilege that gives the shareholder a stake in the way his or her economy is run, and it should be exercised responsibly and with a view to the long term.

 

 Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai

 

 

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view

Saudi Aramco IPO termed a ‘unique investment proposition’

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The Saudi Aramco oil facility in Dammam, 450 kilometers east of Riyadh. (AFP)
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The Saudi Aramco oil facility in Dammam, 450 kilometers east of Riyadh. (AFP)
Updated 04 November 2019

Saudi Aramco IPO termed a ‘unique investment proposition’

  • In a few weeks, investors will be able to deal in shares in the world's most profitable company
  • The international aspects of the biggest share sale in history will have to wait a little longer

DHAHRAN/DUBAI: The 21-page document published by Saudi Aramco on Sunday in Dhahran seemed almost anticlimactic, after all the hype that had initially surrounded it. 

But those dry-as-dust business phrases have kicked off a process that could transform the lives of Saudi Arabia’s citizens and residents, the international energy industry and the world of high finance.

In a few weeks, Saudi citizens, resident expatriates and professional foreign investors in the Kingdom will be able to buy and sell shares in the most profitable company in history on the Saudi Stock Exchange (Tadawul).

Over the next couple of years, there are likely to be more share sales, either to big investing institutions and industry partners around the world, or on a foreign stock market — perhaps even both.

Aramco, already a global giant in its commercial operations, will be a truly international company in its investor makeup too.

FASTFACT

$75 billion

Total cash dividends declared for 2020 by Saudi Aramco.

As Yasir Al-Rumayyan, chairman of Aramco and governor of the Kingdom’s Public Investment Fund, said, it is a “milestone” in the company’s 81-year history, and in the history of Saudi Arabia.

It will be a “unique investment proposition,” as the document understatedly recognized. The Vision 2030 reform plan, designed to open the Kingdom up to the world, will have a truly global corporate champion.

But the international aspects of the biggest share sale in history will have to wait a little longer. 

The initial public offering (IPO) announced on Sunday will, at least initially, be a largely Saudi affair.

The Kingdom’s citizens will be given encouragement and incentives to take up shares, its own financial and investment institutions are likely to be the most enthusiastic buyers of the shares on offer, and Saudi stock markets will be the area where valuations will be tested.

In the section titled “IPO Retail Incentive Arrangement,” the document sets out the benefits that people living and working in the Kingdom can expect.




The petroleum giant, having now received approval, will list a small number of shares on the Saudi stock exchange Tadawul, in an initial public offering.  (AFP)

Retail investors, under “tranche B” of the issue, are the individuals who want to buy or sell shares on their own account, rather than as part of an investing institution.

Saudi nationals, including female divorcees or widows with Saudi minors, can buy shares for themselves and their families (as long as they are registered on the family ID card), and will be eligible to receive bonus shares (100 each, as long as they hold the original IPO shares for a minimum of 180 days after first listing).

The IPO is open not just to Saudi citizens, as another part of the document makes clear. “Any non-Saudi natural person who is resident in the Kingdom and any Gulf Cooperation Council national” can also buy shares and be eligible for the bonus issue, as long as they bank with one of the institutions on the IPO-approved list.

The government wants to make the IPO popular and profitable. Some analysts have warned of the risks if smaller investors take on extra debt to buy shares and are left with big loans if the shares do not perform well.

While the retail element to the IPO is important for symbolic and patriotic reasons, the big money will come into the offering via global institutional investors, which are the driving force in any financial system.

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They will fall under tranche B of the offer, and will likely receive a share allocation at least four times those eligible under tranche A.

Many of these potential investors will be big Saudi investment groups (banks, insurance companies or pension funds) that already buy and sell on a daily basis on Tadawul. But foreigners will also be eligible to take part in the IPO.

The Capital Markets Authority (CMA), which regulates Tadawul, has already opened up the Saudi market to foreign investing institutions, provided they meet the standards for “qualified foreign financial institutions.” 

Many have piled into the market after Tadawul gained admission to global index rankings such as the MSCI marker this year.

Sunday’s document took further measures to strengthen the appeal of the IPO to foreigners, with the creation of a “specialized investor” category, subject to the approval of the CMA.

It is among these key foreign investing institutions that much of the debate will be focused, especially among those from Europe and North America.

In the run-up to the announcement, it was these investors that harbored the biggest doubts about valuation and governance concerns in the IPO. 

But Aramco is advised by the cream of financial institutions in Wall Street and the financial centers of Europe, which will be well paid to ensure that the IPO is a success among foreign investors.

 


US-China trade deal gets tepid reception

Updated 44 min 36 sec ago

US-China trade deal gets tepid reception

  • The US Trade Representative office said they expect to sign the phase one agreement in the first week of January
  • US farmers and retailers welcomed the end to the dispute, but also wanted to see more information

WASHINGTON: US officials announced a truce in the trade war with China with much fanfare, but economists and trade experts call it largely a victory for Beijing.
After a dispute that raged for close to two years, with several fumbled efforts at a resolution, the US agreed to cancel planned tariffs and rollback others immediately, without a similar commitment from China to lift tariffs it imposed on the US.
“Pardon me if I don’t pop champagne, but aside from a cessation of continued escalation, there is not much worth cheering,” leading China expert Scott Kennedy said in an analysis of the agreement.
“The costs have been substantial and far reaching, the benefits narrow and ephemeral.”
The US Trade Representative office said they expect to sign the phase one agreement in the first week of January, and issued a fact sheet highlighting key points, including enforcement provisions and improved protection for American technology.
In addition, it includes a Chinese commitment to buy $200 billion more in US goods and services over two years, USTR said.
That would be a significant increase: China imported just shy of $190 billion in goods and services in 2017, so if the target is met it would cut the US trade deficit with China by a third.
President Donald Trump has long railed against the trade imbalance, citing it as proof China is using distorting policies to gain an unfair advantage.
Trump tweeted that Beijing “agreed to many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more.”
Alliance for American Manufacturing President Scott Paul said agreeing to remove tariffs amounted to “giving away much of our leverage, while kicking the can down the road on the most meaningful trade issues with China.”
And trade economist Mary Lovely said the deal could only be viewed as a “partial win” which “didn’t move the needle very much.”
“We were kind of on a brink, and we saw the negotiators reach a deal that pulled us back, and I think that is important,” she said of the news Trump canceled the 15 percent tariffs on electronics that were due to hit Sunday.
But the gains in the deal do not compensate for the damage to US farmers and businesses, she told reporters.
“President Trump is desperately trying to get back to where the economy was 18 months ago,” before taking this “unilateral, brute force approach,” Lovely said.
But Kennedy said that in exchange for “only limited concessions, China has been able to preserve its mercantilist economic system and continue its discriminatory industrial policies at the expense of China’s trading partners and the global economy.”
US farmers and retailers welcomed the end to the dispute, but also wanted to see more information.
American Farm Bureau Federation President Zippy Duvall noted that prior to the eruption of hostilities China was the second-largest market for US agricultural products, but dropped to fifth.
“Reopening the door to trade with China and others is key to helping farmers and ranchers get back on their feet,” Duvall said in a statement.
In addition to the collapse in exports, and surge in farm bankruptcies, the US government has paid tens of billions of dollars in aid to farmers to compensate for lost sales — funds that come from tariffs paid by US consumers and businesses.
The National Retail Federation, which has long opposed US tariffs, particularly the last two rounds which hit consumer products in particular, said “the trade war won’t be over until they are eliminated completely.”