As Saudis Prepare for IPO, Some Have Misgivings

Posted by Joseph Keefe

Many Saudis support oil firm Aramco's share offer,
but some express concern in rare public criticism.

Jamil Farsi, a prominent Saudi Arabian jewellery tycoon, made an
impassioned plea to the investment minister at a meeting of the
Jeddah Chamber of Commerce this month.

"I don't know anything about economics but I beg you, and I beg
the officials in the country, not to sell Aramco - not 5 percent,
not 1 percent," he said.

Investment minister Majed al-Qasabi replied the economy would
benefit from the sale of shares in national oil giant Saudi
Aramco. It is expected to be the world's largest initial public
offer, raising tens of billions of dollars.

But Farsi's plea underlined misgivings among substantial parts of
the public and the business community about the sale. Some fear
Riyadh is relinquishing its crown jewels to foreigners cheaply at
a time of low oil prices.

Those misgivings are not likely to block the IPO, which is a
central part of a drive to make the economy more efficient and
diversify it beyond oil exports. Since 2015, the government has
shown it is willing and able to carry out contentious reforms,
such as cuts to civil servants' financial allowances.

But the public criticism, rare in a country where there is
usually little open debate about government policies, could
influence the way the IPO is structured. Up to 5 percent of the
company is due to be sold next year, with listings in Riyadh and
at least one foreign market.

The offer's huge size means foreign investors will have to play a
big role, but the government will be under pressure to
demonstrate that Saudi citizens are benefiting most from it,
bankers and analysts said.

That could mean reserving a large portion of the offer for
individual Saudi investors, and pricing it in a way that boosts
the chance of them making money on their investment, perhaps by
offering them some form of discount.

However, such a step could make it even more difficult to achieve
a market valuation for Aramco close to the $2 trillion publicly
estimated by Deputy Crown Prince Mohammed bin Salman, who heads
the reform drive.

Some opponents of the IPO, and some bankers and analysts, think
$2 trillion is too optimistic.

Last year Foreign Reports, a Washington-based oil industry
consultancy, estimated that Aramco could have a market value of
$250-460 billion, excluding the value of refining assets and
guaranteed access to oil and gas.

"There is real concern among Saudis with regard to the Aramco
IPO," Mohammad Sabban, a former adviser to ex-oil minister Ali
al-Naimi, told Reuters.

One area of concern is whether Saudi citizens will be allocated
most of the issued shares; another is whether foreigners will
gain any control over Aramco's operations through this and any
subsequent share offers, he said.

An Aramco spokesman said: "Saudi Aramco does not comment on
rumours or speculation."

PUBLIC

Recently, supporters and opponents of the IPO have sent tweets
with the hashtags in Arabic "#The people are against selling
Aramco" and "#We definitely want Aramco's IPO".

Some tweets say Saudis should support any measure the government
sees as right. Others compare the IPO to Egypt's sale of the Suez
Canal to British colonialists or Palestinians' loss of their
land.

"There is some opposition to the IPO on the grounds of economic
nationalism. The company is viewed as if it were the goose that
laid the golden egg," said Jim Krane, an energy fellow at Rice
University in Texas.

"Some Saudi citizens seem to fear they won't benefit, that there
is nothing in it for them."

Krane said the IPO had also become a lightning rod for resentment
of tough austerity policies which Prince Mohammed has imposed
since 2015 to repair state finances in an era of cheap oil. "Now
some people who oppose these cuts are starting to oppose the
Saudi Aramco IPO."

Other prominent Saudis, while acknowledging the need for
austerity, argue it isn't necessary to sell shares in Aramco.
Othman al-Khowaiter, a former Aramco vice-president, told Reuters
a sale could prove uneconomic as oil prices looked set to rise in
coming years.

"It isn't logical to sell any percentage of our main source of
revenue under the pretext that we need more income. And we know
that the current income from oil exceeds our basic needs."

The IPO has plenty of supporters. Sadad al-Husseini, a former
senior Aramco executive and now an energy consultant, said much
opposition to the deal was based on misunderstanding its logic.

"The intent is for the IPO to raise large sums of capital that
are critical for financing the diversification of the kingdom's
future economy."

But while Husseini said he was confident the IPO would go ahead,
he added that economic and political considerations meant how
fast and in what form remained to be seen.

A Saudi banker said that to avoid public criticism it was getting
short-changed, the government would need to achieve a valuation
for Aramco not far from $2 trillion.

That could require big policy adjustments - for example, a sharp
cut in the tax which Aramco pays, although that could reduce the
government's recurring income.

If something close to $2 trillion doesn't look likely to be
achieved, the IPO could conceivably have to be delayed, said the
banker who declined to be named as he was not authorised to speak
publicly.

By Reem Shamseddine and Andrew Torchia

Feb 24, 2017

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