Saudi Arabia’s Capital Market Authority on Sunday announced that the kingdom had approved plans for turning Saudi Aramco, its hugely profitable national oil company, into a publicly traded corporation. An initial public offering of 1 percent to 3 percent shares is expected in December, but may come later.
Prince Mohammed bin Salman touted a valuation of $2 trillion three and a half years ago, but it seems that the underwriters are looking for a valuation between $1.3 trillion and $1.7 trillion. If it is a $1.7 trillion valuation and the Saudis list 2 percent of the shares — the most common assumption — they will make about $30 billion. A 3 percent listing of shares at that valuation could garner the kingdom $51 billion.
On its own, Aramco is an impressive business and an enticing investment opportunity. It makes more profit than any other company; it made $111 billion in profit in 2018, while Apple with $59.5 billion was second. Aramco pumps more oil at lower costs than any competitor. For 30 years, the company has been on an upward trajectory, diversifying its business and developing deep ties in South and Southeast Asia, the United States and Europe.
At the same time, Aramco preserves the health of Saudi Arabia’s aging oil fields and regularly introduces new technologies to reduce the environmental impact of carbon-based fuels. If profit and loss were all that investors considered, Aramco stock would be a sure bet.
But King Salman of Saudi Arabia is the last remaining globally significant, absolute monarch, and much of his power comes from ownership and control of Aramco.
The Aramco stock offering will be listed only in Saudi Arabia, and global investors will have no practical rights as shareholders. In the United States, a board of directors has a fiduciary duty to the company, not to a king or his government. Shareholders in the United States can and do sue to protect their rights.
But in Saudi Arabia, there is no avenue for redress, and there are no rights other than by consent of the monarch. There is no venue for shareholders to bring a grievance if the company’s and shareholders’ interests conflict with the king’s demands. Saudi Arabia has written laws to nominally protect shareholder rights, but they are new and untested. No Saudi regulator will ever act against the wishes of the king.
Saudi courts are not independent, and no judge could rule against the will of the king in favor of foreign investors. As a bond prospectus prepared for Aramco this year explained, even if a foreign court were to adjudicate a claim, “courts of the Kingdom are unlikely to enforce a judgment outside the Kingdom without re-examining the merits of the claim.” Essentially, if you invest in Aramco, you will, for the purposes of this investment, become a subject of the absolute monarch of Saudi Arabia.
King Salman and Prince Mohammed are exerting more control over the company than any of their predecessors. The monarchy is using Aramco to pursue its own interests, not those of the company, and that is where problems will arise with future public shareholders. Prince Mohammed decided to list Aramco on Tadawul, the small local stock exchange. Regulations preclude individual non-Saudi investors from buying Aramco stock, but already, American and European mutual funds, hedge funds and pension funds are being aggressively courted to buy into Aramco.
Since Aramco is set to be listed only in Saudi Arabia — at least for some time — investors need to understand that they will be operating under Saudi Arabia’s financial system and Tadawul’s rules, which are enforced only at the discretion of the king. This means that for all intents and purposes, they will forgo their shareholder rights when they purchase a Saudi asset in Saudi Arabia. The public shareholders’ interests will not be protected when they diverge from those of the king.
This should be a very real concern for funds and investors. The Saudi sovereign wealth fund, the Public Investment Fund, which is overseen by Prince Mohammed, forced Aramco to buy from it 70 percent of a petrochemical company that Aramco did not want. Prince Mohammed wanted the cash for the P.I.F., and Aramco was his piggy bank. If the monarchy forces a publicly traded Aramco to take actions against its interests in the future, foreign investors will have no legal recourse.
Of serious concern should be the very large dividend the Saudi government takes from Aramco, which until now has never been an issue because the king has been the sole owner. The dividend is nominally approved by Aramco’s board of directors, whose membership is controlled by the state. The dividend is calculated so that it, along with the taxes and fees Aramco pays to the government, funds what Saudi Arabia needs.
Saudi Arabia expects cash from the company to provide about 60 percent of government revenue. In 2018, the government relied on Aramco for $101.7 billion from taxes and nearly $60 billion from dividends. Even if Aramco has a bad year — say the price of oil drops or Iran attacks again — the government will still take what it needs. Public shareholders will have nowhere to turn if the company is forced to sacrifice its interests to fulfill the authoritarian government’s budget.
When a fund invests in Aramco upon its initial public offering, it will be relinquishing any rights as a shareholder. Perhaps this is fitting, because the fund — and those who invest in it — will also be contributing to strengthening the Saudi monarchy.
The money raised from the Aramco I.P.O., and any subsequent offerings, will not go to the company. It will go to Saudi Arabia — to the king and his government. And every subsequent purchase of Aramco shares will raise the value of the company just a little, further enriching the king.
Each day, investors set aside morals and ideals when trying to make money on the open markets. Shareholders of fossil fuel companies are a good example of this. But everyone whose money might buy shares in Aramco should know what an investment in Aramco means. This is not simply an investment in a successful company with a great track record, exceptional assets and skilled leadership. This is a little taste of what it is like to be a subject of an absolute monarch. And it helps fund that monarch, too.
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