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Saudi Aramco’s IPO choice: London, New York — or both?

I spent much of last week in London being persuaded that the city’s stock exchange was the appropriate place for listing shares in Saudi Aramco — apart from the Tadawul, of course, where it is guaranteed star billing.

I almost bought it. The London Stock Exchange (LSE) is a fine, venerable institution, still by far the biggest in the European trading zone. It wants the Aramco business, and the regulator, the Financial Conduct Authority, has bent over backwards to help them do it.

Maybe some investment professionals have reservations about being minority shareholders in a government-controlled entity, but they have the ultimate option: If they do not like it, do not buy it. 

They would have to explain why they decided to give up a generous dividend stream from Aramco on a point of principle, but that’s their business.

So London — mindful of the possible drain of financial business post-Brexit — would welcome Aramco. And there are many in Saudi Arabia who think London is good for them too.

But it is not a forgone conclusion, because there is another contender in the race for the Western half of the Aramco listing. Not just any old contender either, but the biggest and most powerful stock exchange in the world, sitting in the heart of the global financial capital: the New York Stock Exchange (NYSE).

The NYSE is four times the size of LSE, which itself is third in the global stock market rankings behind Tokyo. If it is liquidity Aramco wants, the NYSE is a better bet than the LSE. If it wants to get to the $2 trillion valuation that has been officially placed upon it, it has a better chance of doing that on the NYSE.

At $2 trillion, or about 40 percent of the total LSE capitalization, Aramco would risk swamping the London market; on NYSE it would be a big, but digestible, 10 percent of its massive $21 trillion market capitalization.

Some have suggested that Aramco would find it hard to live with the stringent levels of regulatory disclosure required for a NYSE listing, and it is true that the initial public offering (IPO) will make unaccustomed demands of the Saudi company in this aspect.

There are pros and cons to listing in the big financial hubs either side of the Atlantic. In the end, it will be as much a political as an investment decision.

Frank Kane

But apart from a few variations in disclosure requirements — like the frequency of reporting and how oil reserves are assessed and calculated — there is little to chose between the American and British markets with regard to regulation. In some ways, the UK has a rather tougher investor culture, as the outcry by some London investment managers has shown.

The armies of investment bankers, lawyers, accountants and energy consultants hired by Aramco (many of them from the heart of Wall Street) will be working round the clock to ensure that their client complies to every specific aspect of US market rules. 

The main objection that has emerged to a listing on NYSE — identified by Aramco’s own legal advisers, according to reports — are the “legal and political” risks associated with it. By this is meant the rather more litigious culture of American lawyers in general, where class actions — litigation on behalf of a group of aggrieved parties often on a “no win, no fee” basis — are commonplace.

Sure, many Manhattan law firms will be salivating at the litigation prospects of such a juicy target as the Saudi oil giant. But the US legal system is open, transparent and equitable, and does not allow vexatious or unjustified lawsuits.

More specifically, it has been suggested that Aramco could get caught up in the legal furor brought about by the Justice Against Sponsors of Terrorism Act (JASTA). But that highly controversial piece of legislation has nothing whatsoever to do with Aramco, and its main consequence — a huge class action by 9/11 victims and their families — will play out in the US courts over many years anyway, regardless of where Aramco choses to list.

The legal risk is out there in New York, but London has its fair share of litigious lawyers too. There is nothing to stop Aramco hiring the best legal brains in the world to defend it against a potential threat, wherever it might occur.

So, there are pros and cons to a listing either in London or New York. In the end, it will be as much a political as an investment decision. Some well-informed people in Washington DC are convinced that New York will be the winner, given the newly-found cordial relationship between the US and Saudi Arabia.

There is a possible alternative: let them both have a slice of the Aramco pie. That could be indeed feasible, raising the potential number of listing centers to a minimum of four, given Riyadh’s stated intention to also seek an Aramco listing in Asia, probably Tokyo or Hong Kong.

A quadruple listing would be unprecedented — but then everything about the Aramco IPO, the biggest in history, is without precedent.

• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai