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Aramco and an IPO
Over the past few days, as a new, younger generation prepares to take over leadership of Saudi Arabia, the kingdom has been announcing plans to overhaul the structure of its radically oil-dependent economy.
The most concrete of these is a proposed IPO for the Saudi national oil company, Aramco (the Arabian American Oil Company before it was nationalized in the 1970s). The idea would be to sell roughly a 5% interest in Aramco to the investing public, with a dual listing in Saudi Arabia and somewhere else. The leading “somewhere else” contender is the US.
It’s not clear yet exactly what the future shareholders would have an ownership interest in. Aramco contains all sorts of oil-related operations, from exploration and production to refining to petrochemical production. The Saudis intend to restructure Aramco into a holding company with subsidiaries–structured presumably by type of business–before offering equity. To me, it sounds as if the offering will be of stock in a subsidiary, not the holding company.
The obvious answer is that the kingdom wants to raise money to fund its budget deficit. It figures the proposed IPO will raise $100 billion – $150 billion, a figure that already has investment bankers around the world salivating. This, by the way, implies a total value for Aramco of $2 trillion – $3 trillion.
But there’s almost invariably a deeper motivation when a country takes action like this. It wants to focus and streamline operations of the to-be-IPOed company, either because current service is terrible and/or to generate more funds from operations to fill government coffers. The IPO offers potential wealth and prestige to the management of the government-owned company if they run it well. That substitutes for pre-IPO motivation, which may simply be to do the least work possible, and make the fewest waves, without getting fired.
better than they look
In my experience, such IPOs, however dreary the prospectus may sound, often do quite well for at least the first couple of years. Two reasons:
–their scope for change becomes much wider when public scrutiny protects the manager from interference by politically-connected sluggards who like the status quo, and
–managers tend to, in a sense, stop working once they find out an IPO is in the offing. Why make improvements today that will only make post-IPO earnings comparisons harder? Better to save them for the time when the stock is publicly traded and holders of stock, stock options and management incentive plans will cash in on them.
The IPO itself is evidence that the Saudis are serious about a reorientation of their economic priorities. Human nature argues that 2016 will be like wading through molasses for Aramco but that it will break very quickly from the gate after the IPO.
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