Saudi Arabia: Location for State Oil IPO Could Be Critical to Future

3 MINS READAug 11, 2017 | 19:52 GMT

Saudi Arabia is weighing its options in listing its state-owned Saudi Arabian Oil Co. on either the New York or London stock exchanges. There remains considerable debate within Saudi Arabia on where the country will place 5 percent of Saudi Aramco for sale in an initial public offering (IPO). Saudi Aramco's advisers were pushing for London, but Crown Prince Mohammed bin Salman — who chairs the Supreme Council for Saudi Aramco and will make the final decision— has been in favor of listing in New York. Saudi Aramco's IPO is one of the most complicated in recent memory, but it is critical to get right because it sits at the center of the economic reform plan Vision 2030.

There are strengths and weaknesses to listing in London and New York. Saudi Aramco has been lobbying for London because of concerns about the laws and disclosure rules in the United States. Saudi Aramco is apprehensive about the U.S. Securities and Exchange Commission's (SEC) rules on company reserves, as well as about U.S. legal cases under the Justice Against Sponsors of Terrorism Act. But the United States also offers deep capital markets to draw upon, and perhaps more important for the crown prince, the U.S. listing would provide an important capstone to the U.S.-Saudi Arabia relationship. Bin Salman has sought to strengthen those ties since the administration of President Donald Trump came to power.

London, on the other hand, has fewer disclosure rules and less legal risk. One of the biggest concerns with listing in London, however, is that the rules governing premium listings are fairly restrictive. To qualify for a premium listing, companies are typically required to list at least 25 percent of their equity, far above the 5 percent in the Saudi plan. If Saudi Aramco couldn't secure a premium listening, it would be ineligible for some of London's share indexes, such as the coveted FTSE 100. In July the United Kingdom's Financial Conduct Authority (FCA) proposed a new premium category designed specifically for sovereign-controlled entities. That proposal would exempt those entities from some of the rules for qualification under the normal premium listing, such as shareholder requirements. Though the proposal is pending approval, critics claim that the FCA specially designed the new category to attract Saudi Aramco

Saudi Aramco could choose to list in both countries, but doing so would be even more complicated and could delay the IPO, currently planned for next year. Saudi Arabia is also planning on listing on its domestic exchange, Tadawul. Riyadh wants to list domestically in order to improve its own capital markets vital to the Vision 2030 reform plan. Saudi Arabia also needs to push back against domestic concern that it is selling off parts of its economy. But this a thorny issue since Saudi Arabia uses Tadawul to make initial public offerings of parts of its leading companies, often at discounted rates, to Saudi Arabian citizens as a wealth distribution mechanism. Such a strategy for Aramco will be difficult because setting the initial offering price for the IPO will be perhaps the most politicized decision in Saudi Arabia's economic environment since the final nationalization push in the 1980s.

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