ARAMCO’s direct listing arithmetic

ARAMCO, the Saudi Arabian oil company, issued stock at a  USD1.7 trillion valuation last week  and promptly traded up 18% to top USD2trillion. This was in line with the Saudi government’s initial valuation expectations.

This result was achieved essentially by direct listing. I say this since the cap raise was a miniscule 1.5% of market cap. ARAMCO had originally planned to raise closer to 10% of market cap through a network of international banks however the bankers almost unanimously rejected the valuation target that the Saudi’s had suggested. The banks had argued for more of a USD1.2trillion valuation when issuing new shares.

The IPO market is one of the last bastions of financial inefficiency and the Saudi’s determination to stick by their valuation deserves praise. It is well documented that the degree of underpricing in the IPO market is 30% on average, so that investment banks deliberately stuff their favoured clients with cheap stock, which their clients then stag for a quick profit. So when an investment bank quotes $1.2trillion for an IPO they really mean $1.6trillion after factoring in their stag premium.

It appears that this back of the envelope calculation drove the Saudis to dismiss their dealer panel and go it alone. The banking community publicly expressed their criticism of the Saudis based on valuation numbers generated by their captive analysts’ teams but, no doubt, the banks privately bad mouthed the Saudis as crazy and inept in order to keep their clients away from the deal. Depriving the ‘Saudi renegades’ of the international investment community would surely see the direct listing strategy flop, they surmised, thereby exposing ARAMCO as fools and more broadly serving a warning to any other issuer contemplating a direct listing themselves…

…but the fools turn out to be the investment banks themselves. The $1.6trillion inclusive of stag premium is pretty close to the $1.7trillion the stock priced at. This means that the Saudis kept the stag premium for themselves, all $36 billion of it. That is a lot of money…and a watershed victory for the direct listing camp that seems to be growing in importance and actual listing frequency.  In 5 years time my prediction is that direct listing will be the normal approach for any company going public.

One final point on ARAMCO’s decision to go it alone.  The investment banking community seemed to treat ARAMCO as purely a private corporation going public.  In fact, ARAMCO is a sovereign asset ultimately owned by the Saudi people.  ARAMCO therefore had a public duty to their citizens to maximise the value of the asset.  Private shareholders make decisions to go public for many reasons and they internalise the costs versus the benefits as they are the asset owners.  ARAMCO, on the other hand, are stewards of their nation’s natural resources and it is not for them to simply pay a 30% premium of their country’s wealth to a group of international bankers. This point is lost on every commentator that I have read.  Full marks to the Saudis!

A comment on the UK election…

Well, we were correct in predicting a clear triumph for Boris Johnson but the Labour Party route turned out to be deeper than anticipated.  The mischief vote in favour of the Tories sends a clear message to the UK Parliament that the electorate thinks it is an inept institution.  Irrespective of whether they voted for or against Brexit, the UK electorate was aghast at how their representatives cannot follow a simple instruction.

The US Democrats should take note of this dissatisfaction and disenfranchised attitude toward elected representatives.  Our long-range prediction is that Trump and the Republicans sweep the elections in 11 months time for this very reason.

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