Desperate Measures

Saudi Aramco is set to go public for less than it hoped

Image source: New Africa, Morumotto - Shutterstock

What's going on?

Oil firm Saudi Aramco came up short of the $2 trillion valuation it was aiming for in its forthcoming initial public offering, but it can still walk tall: the $1.7 trillion it now wants will still make it the world’s biggest public company (tweet this).

What does this mean?

Aramco, which extracts and refines Saudi Arabia’s oil, is wholly owned by its government. But that’s about to change: the state is selling off 1.5% of the company to investors.

Advisors initially estimated the company could be worth between $1.6 and $2.3 trillion. But it seems international investors think that’s crude arithmetic: they reckon it’s worth nearer $1.5 trillion. Aramco, then, isn’t bothering to persuade them to buy shares. Instead, it’s going to rely on ordinary Saudi investors, who will be able to borrow huge sums from local banks to buy in. Their support should bump it up to between $1.6 and $1.7 trillion, and help it raise over $25 billion – beating Chinese retailer Alibaba to become the biggest IPO ever.

Why should I care?

The bigger picture: It’s a slippery slope.
Over in Russia, oil producer Gazprom Neft reported a third-quarter profit that was 20% lower than last year’s. Lower oil prices caused by an oversupply of American shale oil were to blame. They’ve affected the entire industry, but they might actually be good news for Aramco: its efficient production means it can still make a profit at lower oil prices than its competitors. And that could lead investors to sell their current oil company stocks and buy Aramco instead.

For you personally: The price isn’t right.
As Aramco’s learned, it can be hard to know how much a company will trade for when it makes its shares available. It depends what other investors think it’s worth, which can be hard to guess. That’s one reason prices can plummet on day one of trading – and it might explain why Warren Buffett has called buying an IPO “stupid”…

 

Originally posted as part of the Finimize daily email.

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