Saudi Aramco may create employee shareholders says US think tank
Saudi Aramco may create employee shareholders says US think tank
- New Aramco charter outlines levels of protection for investors against state influence on the company
- Aramco has around 55,000 employees, mostly Saudi citizens
The new charter also allows Aramco to issue different classes of shares, with the possibility of preferred stock paying higher dividends but with fewer voting rights, the analysis shows.
The revelations about the new corporate set-up at the Kingdom’s leading company, and the biggest oil exporter in the world, come in a paper for the Arabia Foundation, an American think-tank based in Washington DC, by Ellen Wald, non-resident scholar at the foundation and author of the forthcoming book “Saudi Inc.”
Wald and a team at the Foundation have translated and analyzed the charter document — previously available only in Arabic from Aramco — and highlighted what it means for the forthcoming IPO, which could be the biggest in history.
In addition to the provisions on employee and preferred shares, the analysis of the charter, adopted in January, highlights the fact that plans for the IPO are progressing and that Aramco plans to list shares on domestic and possibly foreign exchanges “in the near future.”
It spells out that Aramco’s future remains within the sectors of energy and petrochemicals, and will not become an arm of the Saudi government operating in wider industries.
It also outlines levels of protection for investors against state influence on the company, though concluding that “the state will have overwhelming influence on the board.”
An Aramco spokesman said he believed the analysis to be based on an accurate translation of the Arabic document. He added that there was no obligation on Aramco to publish an English version, though this might be available later.
The paper will add further fuel to the debate about the forthcoming IPO and its place within the Vision 2030 strategy to diversify the Saudi economy away from oil dependency.
Wald said: “Significantly, the charter provides insight into the future Aramco initial public offering and the ways it will benefit the Saudi economy and Saudi people during and after the state-led economic transformation. Although the charter does not directly inform on Aramco’s potential valuation, it raises important questions for future valuation.”
The implications for around 55,000 current Aramco employees — most of them Saudi citizens — will be significant.
“Providing Aramco stock to Saudi employees of Aramco could infuse the economy with cash from diffuse sources. This would decentralize wealth, increase commercialism (and private spending), raise real estate values, and perhaps encourage domestic investment in local small businesses. This infusion of wealth into private hands in Saudi Arabia, coupled with private and pension-plan purchases of Aramco stock, would mean that a large portion of Saudi Arabia would acquire a personal stake in the success and future of the largest company in the Kingdom,” Wald said.
“The opportunity for Saudis to own shares in Aramco would be an important contribution to the overall economic transformation of Saudi Arabia, which is currently a primary aim for the Saudi government. The government’s economic transformation plans are, in part, designed to incentivize the people to take a larger stake in their own economic futures,” she added.
The provisions on what kinds of shares can be offered in any further IPO could also have an effect on the eventual valuation of the company. “Although the charter only specifies one class of common stock, Aramco may offer a second class of preferred shares in the future. Preferred shares would limit voting rights but increase dividends, potentially indicating a higher valuation for Aramco while maintaining state control over the Aramco board,” Wald said.
The issuance of preferred shares would require a special shareholder meeting to approve the conversion of common shares.
“Preferred shares do not confer shareholder voting rights to the shareholders, but preferred shares do grant a higher share of the net profit of the company. In other words, preferred shares would offer a higher dividend, if the company creates them,” said Wald.
Higher dividend shares would affect the valuation of the company, which has also been a matter of debate. Some observers have suggested Aramco might struggle to make the $2 trillion estimate put on it when the IPO plans were announced two years ago.
All-American banker heads back to the Kingdom
- "The implementation and execution of Vision 2030 will produce global companies for Saudi Arabia, and we can help in that process," said Citigroup CEO
- "The government has a lot on its plate and privatization takes a long time to set up. Privatization is one of those things that you only want to do once,”
If anybody deserves the description “all-American”, it is surely Mike Corbat, chief executive officer of Citigroup.
New England origins, a Harvard education, Ivy League American footballer and a Wall Street career are all evidence of the fact he was very definitely “born in the USA”, as is the in-bank nickname of “Clark Kent” — the alter-ego of Superman — due to his athletic physique and spectacles.
But last week Corbat was turning his mind away from the USA and toward Saudi Arabia, as the bank formally ended a 14-year self-imposed exile from the Kingdom with a ceremony at its new offices in Riyadh, symbolizing its return to the lucrative markets it first entered in the 1950s, among the first American banks to do business in the region.
Corbat took some time out of the day’s celebrations — a formal ribbon-cutting alongside Ibrahim Al Omar, governor of the Saudi Arabian General Investment Authority, and an elite dinner in the ballroom of the Four Seasons Hotel in Kingdom Tower — to talk exclusively to Arab News about Citi’s plans for the Saudi business at a time of rapid transformation in the Kingdom and the region.
“I am absolutely positive about the economic prospects for this region. We are in 13 countries here, with 2,500 employees, focusing on trade and business, with some consumer presence. The implementation and execution of Vision 2030 will produce global companies for Saudi Arabia, and we can help in that process. Citi can service some of their needs as they expand globally,” he said.
Citi withdrew from Saudi Arabia in 2004 in the aftermath of the 9/11 terrorist attacks in the USA, in a decision later described by executives as “a mistake.” Even before the enormous opportunities of Vision 2030 persuaded the bank it had to have a formal presence again in the Kingdom, and a license from the Capital Markets Authority (CMA) to pursue investment banking and other business there, the bank was back on the scene.
In 2015 it helped Saudi Aramco to raise multi-billion dollar loans, and advised the oil giant on Asian deals. The following year, which saw the formal unveiling of Vision 2030, Citi was involved in the groundbreaking $17.5 billion bond issue that marked the Kingdom’s debut on global capital markets.
Citi was back, but needed a CMA license to win more lucrative business in the big domestic economic transformation under way. That was finally granted in April of last year, and Carmen Haddad, a long serving Citi executive with extensive experience of the Middle East, was made head of the new Saudi operation.
“We’ve been at the front and center of the sovereign bonds drive Saudi has been doing for the past couple of years, and also with syndicated loans. But with the CMA license we can really show our worth. We can help with all future debt and equity transactions,” Corbat said.
Vision 2030 aims to reduce the Kingdom’s dependence on oil, but also to increase the contribution of the private sector to the national economy, and this is one area where Citi feels it can use its global experience. The bank has advised governments around the world on privatization strategies, and Saudi has a privatization schedule that ranks among the largest in history.
The timing and scale of the program is still unclear. Last year minsters put a value of $200bn on the program, but officials in Riyadh last week were talking more in the $60bn to $70bn range. And investors are still waiting for the first big sell-off of a state company. But Corbat insisted Citi would be ready to get involved when the time is right.
“Privatization is obviously a top priority of the Vision 2030 strategy, and we can bring our expertise to bear in this. I think it is right to take your time over something as significant as the privatization program. The government has a lot on its plate and privatization takes a long time to set up. Privatization is one of those things that you only want to do once,” he said.
By far the biggest element of the drive toward a more private sector-focused economy is the plan to sell shares in the Kingdom’s “jewel in the crown”, Saudi Aramco. Citi is among a small group of top global banks vying for business in the Aramco sell-off.
Originally planned as a big international initial public offering (IPO) by the end of this year, valuing the company at $2 trillion, doubts have begin to creep in over the valuation figure, and over the venue for what promises to be the biggest IPO in history. One suggestion is that Aramco will go only for a listing on the Tadawul exchange in Riyadh.
“I don’t know the timing of the IPO. Maybe they [the Saudi authorities] will want to start locally, in which case they have to be sure the capacity and liquidity are there,” Corbat said.
He believes that recent improvements to the market infrastructure in Saudi Arabia — which look set to see the country included in index provider MSCI’s widely-tracked Emerging Markets index from as early as next year — could make an “exclusive” IPO on Tadawul more attractive.
“The MSCI upgrade to emerging markets status will create more liquidity, and foreign investors will have to play their role,” he said.
“All the big reforms that have taken place on the Riyadh market recently have certainly made it a friendlier place for foreign investors. The CMA has been through more change than ever, and it’s a better place for that. The CMA over the past two years has proven to be progressive and consultative,” he added.
Citi found itself indirectly involved in the big anti-corruption campaign of last year, when their long-term partner and shareholder, Price Alwaleed Bin Talal, was among the businessmen detained in the Ritz Carlton hotel in Riyadh.
Corbat is reluctant to comment on the Kingdom’s internal affairs, though he did say that foreign direct investment would not be hit by the anti-graft drive. “I don’t think FDI has been or will be affected negatively by the anti-corruption campaign. Saudi Arabia is already the biggest economy in the region with only limited foreign investment. Imagine how far it could go with more,” he said.
On Alwaleed, he said: “He has been a shareholder since the early 1990s, and he has been a great shareholder, a loyal voice of support and reassurance. We’ve been fortunate to be able to count him as one of our shareholders. In all our dealings with him I’ve found him to be straightforward and transparent.”
Corbat was one of the top American executives who met with Saudi officials on the recent royal visit to the USA, intended in part to counter any adverse investor sentiment from the anti-corruption arrests, and was impressed by what he saw.
“The visit to the USA by the Crown Prince was extremely well received. The whole Saudi delegation impressed us with their drive and commitment to the transformation process. It was a very successful exercise for Saudi Arabia,” he said.
With 35 years at Citi under his belt, including responsibly for unwinding Citi’s “toxic” assets after the financial crisis, and wide ranging experience of the bank’s international operations, he is well placed to gauge global geo-politcal risk.
He sees some threat to the world financial system from the end of quantitative easing, which he called a “renormalization of the global economy”, and a more limited challenge to world economies from possible “trade wars” between the USA and China.
“I think it’s fair to say that if we did have a serious trade war, it would have an effect. But it would not be the end of trade. I think it’s more likely to redraw the trade lines of the world. Trade flows would move away from the big blocks and go through other areas, like Africa and other places for example,” he said.
On regional risks, always a factor in business and financial decisions in the Middle East, he said: “I think they are within acceptable limits and I don’t think they will go beyond that. The region is the leading center for oil and gas so what happens here has global implications,” he said, though with the caveat that the effects of a prolonged trade was on the “bookend” economies of the USA and China could have a negative impact on global commodity prices.
All-American Corbat may be, but Citi’s return to the Kingdom will just not be an exercise in stuffing US executives into the top jobs in Riyadh. The firm is committed to achieving 85 percent Saudi employment levels at its new office, and is already well on the way to achieving that.
“The market for talent in Saudi Arabia is extremely competitive, but we think we have a very strong appeal for candidates. We are very proud of our ability to invest in and train, and to improve home grown talent,” Corbat said.