Saudi Aramco priced its initial public offering Thursday at the high end of the targeted range to give the oil giant a total value of $1.7 trillion in the world’s biggest-ever IPO.
The state-controlled Saudi Arabian Oil Co., commonly known as Aramco, said it would sell 3 billion shares, or a 1.5% stake of the company, at 32 Saudi riyals ($8.53), or at the top of the targeted range of 30 to 32 riyals for a total of $25.6 billion. That exceeds the $25 billion IPO in 2014 of Chinese online commerce company Alibaba Group Holding Ltd., the current record holder.
Still, the share sale falls well short of the initial $2 trillion valuation targeted by Saudi Crown Prince Mohammed bin Salman. The shortfall also risks over exposing Saudi Arabia’s middle-class investors to the future stock-market performance of one company, as many institutional investors outside the country and the surrounding region passed on the offering as too expensive, according to people involved in the IPO process.
Aramco’s statement comes after The Wall Street Journal earlier Thursday reported the IPO pricing details.
Largely driven by domestic and regional individual and institutional investor support, demand for the offering was strong as Aramco had already attracted more than $60 billion of orders as of Tuesday. That interest places the IPO underwriters on track to exercise the offering’s so-called overallotment option of an additional 450 million shares to increase the total funds raised to close to $30 billion from the sale.
Aramco’s shares are scheduled to start trading Dec. 11 on Saudi Arabia’s Tadawul stock exchange.
The IPO marks the culmination of an almost four-year effort by Prince Mohammed to sell a stake in the world’s most profitable company to raise funds earmarked for investments in entertainment and other sectors that would help diversify Saudi Arabia’s oil-dependent economy. But the company had struggled to get the offering off the ground, delaying the original IPO date in 2018 because of questions over the valuation and venue for an international listing.
The kingdom decided, at least for now, against pursuing a dual listing–on the Tadawul as well as a global exchange such as New York or London–to expedite the IPO. Aramco has also said it would pay out a total annual dividend of $75 billion to shareholders. And in another move, the government compromised on its valuation expectations to woo investor support, lowering the target range to $1.6 trillion to $1.7 trillion last month.
Many international investors have argued that even at its current valuation range, Aramco’s IPO is too pricey compared with peers such as Exxon Mobil Corp. and Chevron Corp. In part, those investors were concerned about the power the Saudi government will continue to wield over the company after the offering’s completion.
Aramco garners a mean valuation of $1.26 trillion based on a poll conducted by Bernstein Research of 31 global investors overseeing a total of $3.8 trillion in assets.
“While investors agree that Aramco has superior financial and franchise strength, weak corporate governance and limited earnings growth are reasons for the discount relative to peers,” Bernstein said in a report Monday.
Aramco’s first challenges as a public company will be to avoid a potential backlash from the country’s individual investors and to help it win broader international investor support that might allow it to raise subsequent funds from equity markets.
The Saudi government’s plan to push for an extension of oil-production cuts through mid-2020 at the Organization of the Petroleum Exporting Countries’ meeting this week underscores the significance of a strong Aramco trading debut for the country’s leadership. The Saudis hope the effort will help prop up Aramco’s IPO price.
Aramco plans to sell 0.5% of its shares in the IPO to individual investors, as Saudi banks offered customers loans to buy stock, billboards and ATMs across the kingdom advertised the IPO and state-controlled newspapers urged citizens to invest in it. That generated support for the issue. But at the same time, these buyers could face losses if Aramco’s stock performs poorly once it starts trading.
Global institutional investors who passed on the IPO are unlikely to step in and buy the shares when the stock makes its trading debut, unless it falls to a value more in line with their views. That said, any sustained gain could push investors to buy the stock, despite their valuation concerns. Some investors are betting those gains could be driven in part from index-fund buying, assuming Aramco shares are ultimately included in the MSCI Emerging Markets Index following its listing.
Once Aramco’s shares begin trading next week, a rising stock price could play a key role in helping the crown prince to sell an additional stake in the company to fund his economic reforms. At one point in the IPO process, Aramco had planned to sell up to a 5% stake depending on demand.
Write to Ben Dummett at ben.dummett@wsj.com and Summer Said at summer.said@wsj.com
