A giant IPO on track

Updated 19 February 2017
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A giant IPO on track

The largest initial public offering (IPO) in history seems to be on track. On Friday, the Financial Times newspaper reported that Saudi Arabia is close to appointing the banks that will be lead underwriters on the IPO of Saudi Aramco, the world’s largest oil producer.
Two major banks have been identified, JPMorgan, Saudi Aramco’s longstanding commercial banker and Morgan Stanley that is also expected to be a global coordinator and bookrunner on the listing, according to the news report.
A third bank, HSBC, is tipped for an underwriting role on the Saudi Aramco planned sale of 5 percent stake in the state-controlled company in 2018. The paper said that HSBC’s name was brought up because of its ability to tap Asian investors due to the bank’s origins in Hong Kong and its longstanding presence in the Middle East.
This development is no surprise at all. Saudi Aramco CEO Amin Nasser has pointed out in an interview with Bloomberg’s Editor-in-Chief John Micklethwait during the World Economic Forum (WEF) in Davos last month that Aramco would soon appoint banks that would advise it on theIPO.
So in February, it was reported in the media that Saudi Aramco has chosen Moelis & Co., a boutique investment bank in New York, to be its lead independent adviser on the flotation. Moelis is said to advise the company on how to go about the IPO, including the selection of underwriters and deciding issues such as where the company should list its shares.
As Nasser said, the banks selection is the step that will come before choosing the market where Aramco will list its shares. The list of potential bourses is too long and diverse from Toronto in Canada to Singapore. The company is also working on preparing its quarterly financial statements for the first time. The statements will be ready this year but will not be available to the public until next year when the IPO takes place.
The whole purpose of this exercise is to prepare the company for the flotation and to provide the investors with historical figures to compare future results with.
So, is everything almost in place for the IPO? Not really. There are many pending legal and structural issues to be dealt with and a year’s time could be too short or it could be just enough depending on the speed of the team working on the IPO at Aramco.
So at the “IPO hive,” people are working around the clock and there is no minute to spare. What Aramco needs to decide on hastily is how it will present the company to the global investors? What assets will be included in the sale? At what tax rate it should be sold to public? And at what value the company should be sold?
Aramco’s taxation is still almost the same since the days when it was owned by four American companies. The government obtains 20 percent in royalty fees from the earning and it taxes 85 percent of Aramco’s revenues. At this rate, the cash flow generated from the company will not be enough to lure all the investors. CEO Amin Nasser is aware of this situation and he said in Davos that they were in talks with the government to change the tax regime. So, there are still many things to be done in a limited time. To list Aramco in 2018 is perhaps the biggest challenge for the company.


Saudi stocks receive landmark emerging markets upgrade from MSCI

Updated 18 min ago
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Saudi stocks receive landmark emerging markets upgrade from MSCI

  • Market authorities in Saudi Arabia have introduced a series of reforms in the past 18 months
  • MSCI’s Emerging Market index is tracked by about $2 trillion in active and global funds

LONDON: Saudi Arabian equites are poised to attract up to $40 billion worth of foreign inflows, following a landmark decision by index provider MSCI to include the Kingdom’s stocks in its widely tracked Emerging Markets index.

"MSCI will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index, representing on a pro forma basis a weight of approximately 2.6% of the index with 32 securities, following a two-step inclusion process," the MSCI said in a statement late on Wednesday night Riyadh time.

“Saudi Arabia’s inclusion in MSCI’s EM Index is a milestone achievement and will likely bring with it significant levels of foreign investment,” Salah Shamma, head of investment for MENA at Franklin Templeton Emerging Markets Equity, told Arab News. 

“It is a recognition of the progress Saudi Arabia has made in implementing its ambitious capital markets transformation agenda. The halo effect of such a move will be felt across the stock exchanges of the entire Gulf Cooperation Council (GCC).”

Market authorities in Saudi Arabia have introduced a series of reforms in the past 18 months to bring local capital markets more in line with international norms, including lower restrictions on international investors, and the introduction of short-selling and T+2 settlement cycles.

Such reforms prompted index provider FTSE Russell to upgrade the Kingdom to emerging market status in March, opening the country’s stocks up to billions worth of passive and active inflows from foreign investors.

MSCI’s Emerging Market index is tracked by about $2 trillion in active and global funds. The inclusion of Saudi stocks in the index, alongside FTSE Russell’s upgrade, is forecast to attract as much as $45 billion of foreign inflows from passive and active investors, according to estimates from Egyptian investment bank EFG Hermes. 

The upgrade announcement was widely expected by the region’s investment community, following a similar emerging markets upgrade announcement by fellow index provider FTSE Russell in March. 

“MSCI index inclusion will be a historic milestone for the Saudi market as it will allow for sticky institutional money to make an entry in 2019 which will help deepen the market,” said John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh.