December 20, 2017

Breakingviews: Saudi Aramcos Backup IPO Plan Runs Through China

by Breakingviews

Saudi Arabia’s Mohammed bin Salman is a crown prince in a hurry. Besides detaining members of his family in a corruption sweep and painting a high-tech vision of the kingdom’s future, the young ruler-in-waiting is also planning to sell a chunk of the national oil company, Saudi Aramco, to international investors. For that to proceed in 2018, he’ll need to choose a venue besides Riyadh for the listing early in the year. China looks like the best option.

Setting aside questions about Aramco’s value, which the crown prince himself has pegged at an ambitious $2 trillion, there are hurdles to bringing what’s likely to be the world’s largest corporation to more traditional marketplaces.

Start with London. Britain is bending over backwards to bring Aramco to the London Stock Exchange. Prime Minister Theresa May and then-LSE chief Xavier Rolet traveled to Riyadh and lobbied Aramco’s chairman for the business in April. Over the summer, the Financial Conduct Authority proposed to twist its rules to create a new listing category for companies controlled by sovereign states. Amid some resistance, the rules have yet to be finalized.

There’s also an additional wrinkle. The LSE’s biggest shareholder is the Qatar Investment Authority, the sovereign wealth fund of that country’s al-Thani monarchy. Yet Saudi Arabia launched a trade and economic boycott of Qatar in early 2017, alongside other Gulf nations. The crown prince, in an interview with Reuters Breakingviews in October, called Qatar’s investment a “very, very, very small issue.” But that still signals it’s an issue.

New York has a different problem. President Donald Trump took to Twitter in November to extol the benefits of a U.S. listing. But Saudi Arabia could fall foul of the U.S. Justice Against Sponsors of Terrorism Act, or JASTA. The law passed by Congress in 2016 would allow Americans to sue the Saudi government for damages, on the alleged grounds it helped to plan the 2001 attacks on the World Trade Center and the Pentagon. Aramco’s New York presence would make it the biggest target for the plaintiffs’ bar in American legal history.

Chinese backup

All of which raises the possibility of Hong Kong’s role in Aramco’s future. The Chinese city is morphing from a mere back-up plan to a potential front-runner among the deal’s backers.

One reason is flexibility. Though the Hong Kong exchange would need to bend some rules to allow Aramco to list, Chief Executive Charles Li is loudly signaling his eagerness. He’s pushing a new program called “Primary Connect,” which would allow mainland Chinese investors to buy into initial public offerings in the special administrative region’s exchange. Li says that’s “key” to closing the Saudi float.

Even without the Connect – which would require Beijing’s approval, too – the exchange has other advantages. Hong Kong Exchanges and Clearing is a for-profit company trading publicly in Hong Kong, which regulates listings on the very board on which its own stock trades. It is in its business interest to grant the oil giant an exception to its requirement that companies list a minimum of 25 percent of their stock – something that would instantly render Aramco the largest member of the Hang Seng Index by a margin of around $200 billion.

A 5 percent free float would be easier to swallow. At $100 billion, it would leave the company adjacent to insurer AIA, politely leaving mainland tech champion Tencent in first place. Exchange executives would have to deem the Tadawul exchange in Riyadh to offer standards of shareholder protection “equivalent to those provided in Hong Kong,” but that is unlikely to take long.

The other thing the city can offer is a roster of Chinese state-owned financial gorillas, potentially ready to invest on terms that will give the crown prince the valuation he wants – and not too fussed about transparency. Reuters reported in April that a consortium of government oil giants like PetroChina and Sinopec, major banks and the $800 billion sovereign wealth fund could be rallied to serve as cornerstone investors.

If Aramco does choose Hong Kong, it could signal a political shift. China’s interest in the relationship with Saudi Arabia is strategic, focused on offsetting American influence in the Middle East, and on achieving greater leverage over energy prices. It is therefore likely to ask for a quid pro quo, such as oil-price concessions, supply guarantees, or even denominating oil contracts in yuan instead of dollars. The latter could set off unpredictable changes in global energy and currency prices, and alienate the United States, Saudi Arabia’s primary security guarantor.

The biggest risk might be embarrassment. Non-Chinese companies haven’t done too well out of secondary listings in Hong Kong of late: Swiss miner Glencore and U.S. luxury brand Coach – now known as Tapestry – took down their tickers in late 2017, blaming tepid turnover. There have also been numerous scandals surrounding IPOs by mainland firms. If nobody trades the stock, share prices could struggle to stay in natural sync with the Tadawul, which is unlikely to see much volume.

No matter the reception in secondary markets, an Aramco listing in Hong Kong would be rich in irony: a marriage of convenience between an atheist communist bureaucracy and a monarch from the theological heart of Sunni Islam – united by a preference for opacity.

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