Saudi Crown Prince gives ‘green light’ to Aramco IPO, accepts lower valuation

Saudi Arabia will compromise on valuation to ensure the initial public offering of Aramco is a success.

The kingdom is ready to accept less than the $2 trillion Crown Prince Mohammed bin Salman has long insisted the state oil giant is worth. Bankers will instead target a valuation of $1.6 trillion to $1.8 trillion after the record share sale was given the green light by Prince Mohammed on Friday, according to people briefed on the matter.

The willingness to accept a lower valuation shows the prince has put getting the deal done above being proved right on his $2 trillion estimate. The IPO — a centerpiece of the Vision 2020 plan to transform the Saudi economy — is still likely to set records, outstripping the $25bn by Alibaba Group Holding Ltd. in 2015.

Aramco is also considering boosting next year’s dividend by a further $5bn to $80bn to win over investors, the people said, asking not to be identified before an official announcement.

Although Saudi Arabia’s richest families will underpin demand for IPO, expected to start trading in mid-December, bankers are still trying to woo international investors and have invited money managers in London for meetings next week, people said. A boost to the dividend would complement that effort, bringing yields closer, though still below, those paid by oil majors like Royal Dutch Shell Plc and Exxon Mobil Corp.

An official intention to float will be made on Sunday, people said, firing the starting gun on a six-week sales campaign before the shares begin trading on the Riyadh exchange in mid-December. Aramco’s press office declined to comment.

The partial privatisation will be a deal like few others and the biggest change to the Saudi oil industry since the company was nationalised in the 1970s. Aramco, which pumps 10 per cent of the world’s oil from giant fields beneath the kingdom’s barren deserts, is the most profitable company globally and the backbone of the kingdom’s economic and social stability.

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 Morgan Stanley, Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co.

First suggested by Prince Mohammed in 2016, the IPO was delayed several times as international investors balked at his $2 trillion valuation. An earlier plan to kick off the share sale in mid-October was shelved after bankers received lukewarm interest from money managers.

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 the 2017’s corruption crackdown that saw scores of rich Saudis detained in Riyadh’s Ritz-Carlton Hotel. Authorities said they raised over $100bn 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 internal combustion engine — a technology that drove a century of steadily rising demand — means consumption of oil will peak in the next two decades.

Since Prince Mohammed first mooted the IPO in early 2016, Saudi Arabia and Aramco have re-worked the company’s tax burden to boost profits and hence its appeal to investors. Riyadh first cut the income tax Aramco pays, and more recently it also lowered the royalty the company pays when oil prices are relatively low. The measures boosted the valuation of Aramco, but analysts and investors all but indicated they weren’t enough to reach the $2 trillion.

In a bid to further make the stock more attractive, Aramco already announced plans to pay $75bn in dividends next year. It’s now considering raising that to $80bn. At $1.8 trillion that would mean a yield of 4.4 per cent, a decent payout in a low-interest-rate world, but still lower than the 5 per cent Exxon investors currently get.

Aramco is still holding meetings with its bankers to nail down the details of the offer, and the dividend plan and the valuation could still change.

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.