The global stock exchange battle for Saudi Aramco’s IPO
Saudi oil group has much to weigh up about competing venues for record flotation
Saudi Arabia’s initial public offering of state energy giant Saudi Aramco planned for late next year is likely to be the largest ever, surpassing the $25bn raised by Alibaba in 2014.
Deep and active markets are essential for the one or two foreign stock exchanges chosen to host the shares, alongside a listing on the kingdom’s domestic market, the Tadawul.
Amin Nasser, chief executive of Saudi Aramco, this week said the company was evaluating different venues.
While New York and London are favourites to lead an international listing, according to sources, the company is studying others, including Hong Kong and Tokyo. Smaller rivals in Toronto, Europe and Singapore are also pitching for a role.
The big four offer access to great reserves of investor cash, but they also come with different sets of rules and requirements for officials to consider as they prepare a sprawling state enterprise for life as a public company.
New York
Saudi Aramco’s history might lead it stateside. Before nationalisation in the 1980s, it was controlled by a consortium of US oil companies. The company has ExxonMobil governance structures, and generations of Saudi executives attended American universities.
The pageantry of ringing the opening bell at the New York Stock Exchange is also a lure, alongside commercial arguments. “NYSE has historically been the deepest market and deepest not just in terms of trading volume, but also deepest in terms of the [investor and analyst] communities that assist the listed company,” says Ettore Santucci, a partner at law firm Goodwin.
As a foreign private issuer, the company would also be exempt from some onerous reporting requirements imposed on US companies: for instance, the need to avoid selective disclosure of non-public information to analysts and investors.
Home country or international accounting is acceptable, with a reconciliation to a US-style presentation. Practices can differ from US requirements, such as the need for a majority of independent board members, with an explanation where home market regulations differ from those of the US.
However, the Sarbanes-Oxley Act, passed in 2002 after several accounting scandals, requires robust internal controls at US listed companies. Regulators are strict on calculation of proven and probable oil reserves, requiring an independent review process to test the figures.
Saudi Arabia’s oil reserves have long been a state secret, beyond an unchanging published reserve number, but Khalid al-Falih, the energy minister, has said the kingdom will reveal the figures. He confirmed this week the partial completion of a third-party audit.
Politics could still intervene. A recent ruling to allow families of 9/11 victims to sue the kingdom — 15 of 19 hijackers were Saudi citizens — cannot be ignored. President Donald Trump has opened the door to better relations, but the fluidity of US foreign policy, particularly towards Middle Eastern countries, is seen as a potential wild card.
London
Saudi Arabia has long shopped in the UK for everything from racehorses to fighter jets — it is the largest buyer of British arms. Extensive diplomatic ties suggest the London Stock Exchange, home to some of the world’s biggest resource companies, is a natural choice.
The Financial Conduct Authority is also consulting on a new form of foreign listing, an “international segment” with looser rules than for the premium listing almost every company seeks. “It may be there is slightly more keenness to be open as an exchange following Brexit,” says Nicholas Holmes, partner at law firm Ashurst.
A premium listing usually requires board independence and other investor protections: equivalence between ownership and voting rights, pre-emption rights requiring UK shareholders be offered stock in future rights issues or sales of new shares.
Some flexibility in these rules already exists. Companies can take a comply or explain approach to the corporate governance code, and the authorities can waive a requirement to sell at least 25 per cent of shares if the market will be deep enough to operate properly, as it would probably be with Saudi Aramco. Merlin Entertainment, owner of Madame Tussauds, listed with an initial free float of 20 per cent in 2013, for instance.
A question, however, is the importance officials place on membership of prominent stock market indices. For a group incorporated outside the UK, a 50 per cent free float is required to join the FTSE 100. “Would it all be in vain if they can’t get suitable indexation?” asks Mr Holmes.
Hong Kong
Charles Li, head of the Hong Kong Stock Exchange, said last month that the world’s largest listings venue for the past two years was working “very hard” to secure a part in the Saudi Aramco float.
Positioned as the gateway for China, Hong Kong’s Stock Connect trading scheme is the only direct link between the outside world and the Shanghai and Shenzhen markets — the world’s second-largest pool of equity capital after New York.
The city already hosts three state-owned energy champions in PetroChina, Sinopec and Cnooc. “Hong Kong, London and New York are frankly the only markets with the knowledge of the sector, the peer group and the depth of liquidity to handle a float like this,” says Keith Pogson, senior partner in EY’s Asia-Pacific financial services practice.
“Hong Kong’s added advantage is we have tradition of working with state-owned enterprises and managing through the governance issues of that,” he said.
Bankers also say Hong Kong’s political stability may be an attraction, and technical requirements are unlikely to be an issue. Hong Kong demands a free float of 25 per cent of a company’s equity but this is regularly waived for deals over $1bn. Last year for example, Postal Savings Bank of China floated 15 per cent to raise $7.4bn in the biggest IPO worldwide since Alibaba.
One sticking point could be the strict one-share-one-vote stance, which saw Hong Kong lose Alibaba to a New York market tolerant of a self-selecting management structure.
Tokyo
Japan is going all out for Saudi Aramco, with orders from “very high in the government” to make it happen, if at all possible, say officials.