Saudi Aramco IPO is a no-go

Saudi state-oil giant Aramco’s widely hyped $2trn initial public offering has been shelved. But the company isn’t standing still. Alice Gråhns reports.

911_MW_P08_Shares
The crown prince is sending out the wrong signals

Investment banks that have been working on the initial public offering (IPO) of Saudi Arabia's state-oil company Aramco "are familiar with mirages, even if they have never visited a desert", says Lex in the Financial Times. "The lush oasis on the horizon never gets any closer. Finally, it evaporates." That's what has happened with the widely hyped flotation, which has now been called off.

Aramco's problem wasn't that investors don't like oil producers although Brent crude prices a third below their 2014 level hardly helped matters, says Lauren Silva Laughlin on Breakingviews . One of the main issues was the high $2trn valuation Crown Prince Mohammed bin Salman, also known as MbS, put on the company right from the beginning. Awkwardly for Aramco's "army of investment bankers", the company may be worth some 25% less than the prince's target. They have now "been spared the need to sell an overambitious deal to unwelcoming markets".

The idea was to list a minority stake in Aramco on a foreign exchange to raise $100bn, to be reinvested by the kingdom's sovereign wealth fund, says Andy Critchlow in The Daily Telegraph. That "made perfect sense". But continuous delays and confusion over how to achieve Armaco's desired valuation "sent out all the wrong signals to prospective international investors about Saudi Arabia's reliability".

Its inability to settle on an international exchange to host the IPO reinforced scepticism. As a result, "what once seemed to some an encouraging sign of new visionary leadership from the 30-something princeling to reform the oil-rich kingdom's economy now looks more like impulsive rashness to grab headlines rather than a calculated business decision".

Moving beyond oil

Aramco may not be going public, but it isn't standing still. "MbS's worthy aim [is to build] up Saudi industries that can outlast demand for oil-based fuels," as Lex points out. Aramco is making a start by buying a 70% stake in Sabic, a state-owned refiner and chemicals group. These activities would complement Aramco's oil production and facilitate cost savings.

Meanwhile, Aramco is aiming to become "an innovation powerhouse" in its field, say Benoit Faucon and Summer Said in The Wall Street Journal. America granted it 230 patents last year, a fourfold increase on 2013. Since then Aramco has also doubled the number of scientists in its laboratories and opened nine research centres. It wants to "coax more oil out of the ground and devise creative new uses for its petroleum products".

A robot it developed to inspect pipelines in the Red Sea has yielded seven patents. Aramco has also been talking to Google about using artificial intelligence to look for oil which is just as well, since "some of its prodigious fields are depleting". Still, don't expect lightning progress. Despite its attempts to innovate, Aramco is like a "supertanker", according to Paul Stevens, a fellow at London's Royal Institute of International Affairs. "It takes time to change direction."

Britain's ten most-hated shares

CompanySectorShort interest on 24 July (%)Short interest on 28 Aug (%)
Pets at HomePet retailers13.2113.37
The Restaurant GroupRestaurants12.9812.73
IQESemiconductors12.26711.197
DebenhamsGeneral retailers11.7611.77
CYBGBanks10.478NEW ENTRY
Marks & SpencerGeneral retailers10.0411.14
Anglo AmericanMining9.389.53
GreencoreConvenience food9.34NEW ENTRY
Ultra ElectronicsDefence9.321NEW ENTRY
AAMotoring8.849.731

These are the ten most unpopular firms in the UK, based on the percentage of stock being shorted (the "short interest"). Short-sellers aim to profit from falling prices, so it helps to see what they're betting against. The list can also highlight stocks that may bounce on unexpected good news when short-sellers are forced out of their positions (a "short squeeze"). Lender CYBG, sandwich maker Greencore and defence group Ultra Electronics are new entries. The latter two have warned on profits; markets are sceptical about CYBG's £1.7bn takeover of Virgin Money.

City talk

"What do you do with a finance chief who's presided over such sustained growth in profits, dividends and share price that you've just given him a pay rise for his strong performance'?" asks Alistair Osborne in The Times. That's right: ditch him. Intertek, the world's largest tester of consumer goods, is parting company with Edward Leigh. Has he had a bust-up with CEO Andr Lacroix? Intertek insists not. Apparently the change is all part of Lacroix's efforts to "remove one organisational layer". But "it's not the thickest layer. The only person losing his job is Leigh."

"Extremely busy" is how gambling software provider Playtech described its first half. "It was a fairly barren six months for investors," says Kate Burgess in the Financial Times. Earnings per share dived by a third. The shares are now down 50% in12 months. Revenues from politically volatile markets where gambling is unregulated have historically comprised more than half of total sales. It was a good wager in Playtech's early days, "but winning streaks come to an end". The 10% rise in Playtech's shares last week "will probably turn out to be a fleeting chance for investors to cash in some of their chips".

Private-equity group Apollo Global Management has just scooped up beaten-down Aspen Insurance for $2.6bn, says Aimee Donnellan on Breakingviews. Bermuda-based Aspen, which makes over half its money by reinsuring risks such as property losses, has made a loss in three out of the past four quarters due to natural disasters. Apollo may be hoping that reinsurers will soon be able to charge more now. However, reinsurance rates increased just 1.2%in June.

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