August 23, 2018 / 3:34 PM / a month ago

Breakingviews: Aramco’s failed IPO is a beginning not an end

DALLAS (Reuters Breakingviews) - The failure of Saudi Aramco’s $2 trillion initial public offering is more a beginning than an end. On Wednesday Reuters reported that Aramco had called off the deal – which had yet to officially launch – and disbanded its army of investment bankers. They’ve been spared the need to sell an overambitious deal to unwelcoming markets. But there are plenty more Saudi deals to be done that advisers will hope can be more easily executed.

The logo of Saudi Aramco is seen at Aramco headquarters in Dhahran, Saudi Arabia May 23, 2018. Picture taken May 23, 2018. REUTERS/Ahmed Jadallah

Aramco’s problem wasn’t that investors don’t like oil producers, though Brent crude prices languishing a third below their 2014 level don’t help. The trouble was a $2 trillion valuation Crown Prince Mohammed bin Salman put on Aramco right from the get-go. Awkwardly for bankers at JPMorgan, Morgan Stanley, HSBC, Moelis and Evercore, the company may be worth some 25 percent less than the prince’s target, based on Breakingviews calculations.

But all is not lost. As well as putting Saudi on the global capital markets map, the IPO was meant to help line the coffers of the country’s Public Investment Fund. The state-owned oil company may instead acquire a stake in petrochemicals maker SABIC from the fund. And there maybe other, smaller experiments. Last week Tesla’s founder Elon Musk said that the PIF had enough money to take his company private. And then there is a $45 billion agreement to invest PIF money in SoftBank’s Vision Fund.

Aramco and Saudi can therefore still get financial consiglieri hopped up on the prospects of fees. The challenge for bankers is balancing their client’s demands with their assessment of what markets and investors will actually tolerate. After investing much time on Aramco, they could be more rigorous in asking whether future deals can actually get off the ground.

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CONTEXT NEWS

- Saudi Arabia has called off both the domestic and international stock listing of state oil giant Aramco, Reuters reported Aug. 22, citing four senior industry sources.

- The financial advisers working on what would have been the biggest such deal in history have been disbanded, the report said.

- JPMorgan, Morgan Stanley and HSBC were working as global coordinators, and boutique investment banks Moelis and Evercore were independent advisers, sources had previously told Reuters.

- For previous columns by the author, Reuters customers can click on [SILVA/]

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