The World’s Largest IPO

Usually, Initial Public Offerings (IPO’s) are used by relatively new companies to raise money in the stock market. However, in the year 2018, the world’s biggest IPO is about to be launched. This IPO belongs to Aramco Corporation which is the national oil company of Saudi Arabia. Since Saudi Arabia is one of the largest oil producers in the world, the Aramco IPO is likely to be so huge that it will make even the mega Silicon Oil IPO’s look pale in comparison.

Aramco’s History

Aramco is a remnant of the Standard oil company of the United States. This company was set up in Saudi Arabia with the king’s decree. Earlier it was called the Standard Oil Company of Arabia. However, later its name was changed to Arabian American Oil Company or Aramco.

The Saudi’s did not nationalize Aramco by force. Instead, the monarchy bought shares from the open market. It is surprising to know that this mega-corporation was registered in America till the year 1988. After 1988, the Saudis got complete control of the corporation. Later, this company was incorporated in Saudi Arabia and came to be known as the Saudi Aramco.

Saudi Arabia soon became one of the largest producers of oil in the world and Aramco became a strategically important corporation. It is rumored that Saudi Aramco produces as many as 13 million barrels of oil per day. Also, it has the rights to at least 250 billion oil barrels which is the estimated supply left in Saudi Arabia.

Considering these facts, the mega valuation of Saudi Aramco shouldn’t come as a surprise to anyone. However, what is surprising is the fact that the Saudis have decided to take this company public. The Saudis are known for their secrecy. However, once the company goes public, they will be forced to divulge data about its operations.

Aramco’s Proposed Valuation

The best investment bankers in the world are trying to get a mandate for this IPO. After a highly contested race Aramco has appointed JP Morgan, HSBC and Morgan Stanley as the underwriters for this mega public offering.

After this IPO is launched, Aramco is likely to become the most valuable company in the world. If market rumors are to be believed, Aramco will sell a 5% stake for $100 billion. This means that the entire corporation will be valued at over $2 trillion. This valuation is greater than any other listed company including giants like ExxonMobil, Amazon, and Apple.

Many doubts have been cast over the high valuations being demanded by Aramco. However, JP Morgan has been advising the oil company to undertake some financial restructuring. This restructuring exercise will make Aramco’s downstream businesses more valuable. As a result, investment bankers will be able to convince the investors that the IPO has been fairly priced.

The Aramco IPO was supposed to happen in the first half of 2018. However, the Saudis wanted to ensure that they get an attractive valuation. Hence, the IPO has been postponed till the restructuring exercise is complete.

Where Will Aramco List Its Shares?

At the present moment, it is known that Aramco will list their stocks on the Saudi stock exchange. However, in order to make the investment palatable to western investors, it is likely that the Saudis will also list the stocks in London, Tokyo as well as Toronto.

Ideally, the New York Stock Exchange would have been the best place to list these stocks. The market has the liquidity as well as the financial strength to absorb such a huge IPO. However, the disclosure norms being followed by New York Stock Exchange are very stringent. As a result, Aramco would have had to divulge the amount of oil that Saudi Arabia has in reserves. This information is considered to be classified in Saudi Arabia. Hence, it is likely that Aramco will not list on the New York Stock Exchange.

The Problem with Listing in Saudi Arabia

Aramco will be the largest company in the world after this listing. However, the Saudi stock exchange is only the 25th largest stock exchange in the world. The problem with listing on the Saudi exchange is that many institutional investors like pension funds will not be able to invest in this IPO. The articles of association of many funds do not allow them to make investments in stock exchanges which may not be accredited. This will dampen the demand for the shares and will certainly exert a downward pressure on the prices. However, there isn’t much that the Saudis can do. Given a choice between lower valuation or divulging national secrets, the lower valuation would be the only viable option.

How Will The IPO Affect Oil Prices?

Oil prices across the world have been depressed ever since hydraulic fracturing has been discovered. This process has enabled America to produce oil from shale oil reserves which are present in abundance in the United States. Therefore, the demand for oil has been subdued leading to a price correction.

However, the Saudis are the largest and the most powerful nation in OPEC. Hence, they may decide to squeeze supply in order to jack up prices just before the IPO. This will help create a positive image in front of the investing community. Hence, there are hopes that the price of oil may spike a few days before the IPO.

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