- Saudi Aramco IPO puts the company’s valuation at $1.6 trillion, which is bigger than the Canadian economy.
- The IPO is currently facing marketability issues in overseas markets.
- Funds from the IPO will be used to further Vision 2030 projects.
Saudi Aramco has issued a press statement announcing its move to sell a 1.5 percent stake of the company. The indicative price of the 3 billion shares that it intends to sell is about 30 Saudi Riyals ($8). The IPO is estimated to be valued at $25.6 billion.
If the event goes ahead, the offering will be the biggest in history, surpassing Alibaba’s 2014 $25 billion IPO record. This brings the overall evaluation of the company to about $1.6 trillion, which is bigger than the Canadian economy.
A Few Challenges
The Aramco IPO process is currently facing some challenges. Among them is diminishing interest among foreign investors. Initially, a group of international financial institutions was chosen to rally major foreign investors into buying the shares.
They included JP Morgan, Credit Suisse, HSBC, Goldman Sachs, Merrill Lynch, Citigroup, and Morgan Stanley, but their participation was scrapped due to low interest in these markets. One can speculate that the low demand was caused by revulsion at the leadership following the killing of journalist Jamal Khashoggi in Istanbul.
There are also concerns that Aramco might be overvalued. This is not to mention that some investors question Aramco’s administrative style. Moreover, a slew of companies such as Chevron, Shell, BP, and Exxon are favored among oil investors due to their high dividend yields, and this makes them more attractive when compared to the Saudi-owned Aramco.
Consequently, the Saudi government is paring back efforts to promote the IPO in overseas markets and focusing on local investors instead. There is surging demand for the shares in the local market, a factor that is hard to ignore. As such, the IPO is set to be dominated by regional investors, especially those looking to deepen ties with the kingdom.
Why the Rush to Diversify the Economy
Oil exports currently drive the Saudi Arabian economy. The resource accounts for about 42 percent of the GDP and approximately 84 percent of all exports. This means that oil is at the heart of the state’s financial system. The inseparability has some major risks as the market is broadly tumultuous.
The current Aramco IPO is in line with Vision 2030. The Crown Prince Mohammad bin Salman unveiled the project in 2016. It endeavors to push the economy towards being a global investment powerhouse, and a regional epicenter of trade.
Saudi Arabia has a sizeable young generation that is educated and in need of jobs. Around 51 percent of the country’s population is comprised of youths below the age of 25 years. This unique demographic profile is expected to push demand for jobs in the coming years, hence the need to fulfill Vision 2030 goals before then.
The country’s leadership has historically maintained social peace by providing salaries, substantial social welfare, and subsidies to its citizenry. The bulk of the funds are usually from oil exports.