https://www.cnn.com/2019/11/03/investing/saudi-aramco-ipo/index.html
2019-11-03 10:25:00Z
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LONDON — Saudi Arabia said on Sunday that it had approved plans for the giant state-owned oil producer, Saudi Aramco, to go public, taking the country’s crown jewel and what is probably the world’s most profitable enterprise close to its long-awaited goal: becoming a publicly traded company.
The country’s Capital Market Authority said that Aramco planned to sell an unspecified percentage of its shares, which are expected to begin trading next month. Bankers on the transaction have told the Saudi government that investors are likely to value the company at about $1.5 trillion, people briefed on the matter said previously.
Aramco is the behemoth in the oil business, alone producing about one-tenth of the world’s output. Last year, it made $111 billion in net income, almost twice Apple’s profit and many times the earnings of lesser rivals like Exxon Mobil and Royal Dutch Shell.
And Sunday’s announcement sets up what may be the biggest initial public offering ever, with a chance to exceed the nearly $22 billion that Alibaba, the Chinese e-commerce giant, raised in one day in 2014.
But Aramco’s initial public offering will fall short of Saudi Arabia’s audacious goals.
When Mohammed bin Salman, the country’s de facto ruler, first announced plans to take the company public in 2016, he said that the company would be valued at about $2 trillion, that the offering would take place by 2017 and that its shares would trade on both a premier international stock exchange, such as New York, London or Hong Kong, as well as the Saudi exchange in Riyadh.
Yet Aramco appears poised to be valued well short of $2 trillion. And its I.P.O. process has proceeded in fits and starts over the past three years, pausing several times over the complications of readying its finances and operations — long shrouded in secrecy, even as it gushed wealth for its kingdom — for the scrutiny of public investors.
And while Prince Mohammed, the country’s crown prince, had been eager to have Aramco trade on both the Tadawul, the local stock market, and a more prominent stock market, that appears off the table for the time being.
At last week’s investor conference at the Ritz-Carlton Hotel in Riyadh, Saudi officials made clear that the crown prince’s thinking was critical to the I.P.O.
The prince’s older half brother, Prince Abdulaziz bin Salman, who was recently appointed energy minister, told the conference on Wednesday that the listing would be “a Saudi decision first of all and, specifically, Prince Mohammed’s decision.”
Much of the proceeds from the offering are not likely to flow to Aramco’s operations but into the Public Investment Fund, a Saudi sovereign wealth fund that is evolving into the prince’s main vehicle for shifting the country’s economy away from its reliance on oil.
Along with venture capital investments like Uber, the ride-sharing service that has a strong presence in the kingdom, the Public Investment Fund is putting money into renewable energy and enormous real estate projects aimed at creating jobs for Saudis. Neom, a vast futuristic city planned for the northwest of the country, will require $500 billion from the Public Investment Fund and other investors over time, according to its website.
On Wednesday, the fund announced that it was borrowing $10 billion from a group of international banks, including JPMorgan, Citigroup and Bank of America. The loan would help “accelerate” the fund’s investment program, according to a news release.
It is not hard to see why the prince is pressing for quicker results fueled by an Aramco share sale. The economy has yet to see big payoffs from his schemes. Unemployment among Saudi nationals remains elevated at 12.7 percent.
What remains indisputable is how big Aramco is. It earned $46.9 billion in the first half of the year and produced 10 million barrels a day, giving it a financial and production heft that analysts have said would lure in international investors.
Still, questions are likely to dog Aramco executives and their army of advisers as they continue to pitch prospective investors on the offering. Some will center on how the company has recovered from a devastating drone and missile attack in September that temporarily shut down half of its production.
The physical damage may have been largely repaired, but investors will probably remain worried that its facilities remain vulnerable to another assault, given the political tensions between Saudi Arabia and its neighbors.
“There is a risk of further attacks on Saudi Arabia, which could result in economic damage,” said Fitch Ratings in September when it downgraded Saudi Arabia’s credit rating to A, from A+.
Investment in Saudi Arabia has generally been tempered by the killing and dismemberment of the Saudi dissident and journalist Jamal Khashoggi by Saudi agents last year. Prince Mohammed has accepted responsibility for the killing, but denied ordering it. Those concerns, though, were hard to find at last week’s investment conference, where Wall Street executives and world leaders converged.
Aramco’s status as the world’s mightiest oil company comes as concerns about climate change have raised doubt about the future of fossil fuels. Top institutional investors like the Singaporean sovereign wealth fund Temasek have already suggested they will reduce their exposure to fossil fuels, potentially ruling them out as backers of Aramco.
Aramco officials are addressing those concerns by putting around $600 million a year into research and development in areas like more efficient car engines and vehicles equipped with devices for capturing much of the carbon dioxide emissions that they produce.
The company is also investing in plants and joint ventures aimed at funneling more of its oil into chemicals, which Aramco’s leadership believes will see relatively strong growth in the coming decades, when demand for transportation fuels may fall off as alternatives like electric vehicles become more available.
“The pessimism around oil is misplaced,” Aramco’s chief technology officer, Ahmad Al Khowaiter, said in a recent interview at the company’s headquarters in Dhahran. “The growth is in materials; it is in chemicals,” he added.
Michael de la Merced reported from London, and Stanley Reed from Riyadh.
PARIS— Carlos Tavares stunned the auto world when he left his post as heir apparent to Carlos Ghosn at the globe-spanning Renault-Nissan alliance six years ago and then took the reins of struggling rival Peugeot, which sold relatively few cars outside Europe.
Now the 61-year-old chief executive of Peugeot’s owner, PSA Group of France, is stepping back onto a wider stage. Mr. Tavares negotiated a nearly $50 billion merger with Fiat Chrysler Automobiles NV that, if completed, will mark one of the biggest auto-industry deals in decades and leave him CEO of the combined company.
The deal presents Mr. Tavares with new challenges. He rescued Peugeot largely by cutting costs and focusing on the bottom line, and he has touted the virtues of staying nimble rather than chasing scale in a rapidly changing industry.
“We are not market-share addicts,” Mr. Tavares said in a March interview with The Wall Street Journal. “We believe agility is very important.”
Yet the proposed merger would create one of the world’s largest car companies, an auto-making behemoth with a major North American presence and nearly a quarter of the European market.
Peugeot was bleeding cash when it recruited Mr. Tavares in 2013. Under his leadership, PSA has gone from losing €5 billion (about $5.6 billion) in 2012 to last year reporting a net profit of €3.3 billion, with a margin of 8.4% in its core automotive business, making it among the most profitable mass-market car makers in the industry.
He achieved the turnaround in large part by slashing production and preaching the dangers of expanding too fast or chasing sales with discounts. He also trimmed the workforce without closing factories, negotiating an agreement with unions to cut the standard workweek for some employees and eliminate jobs through buyouts.
“One of the challenges for us is to keep that near-death experience alive,” Mr. Tavares said in a 2017 interview with the Journal. “It teaches you what you really need to do.”
But he also saw that scale was vital for survival as the global auto industry heads into its next downturn, according to people familiar with his views.
PSA was in danger because of its reliance on Europe’s sluggish market. In 2018, PSA sold 3.95 million vehicles, compared with 10.85 million for Volkswagen AG and 10.4 million for Toyota Motor Corp. Nearly 80% of PSA’s sales were in Europe.
For months, PSA and Fiat Chrysler have been holding on-again, off-again talks about teaming up, according to people familiar with the discussions. The conversations were briefly interrupted in May by Fiat Chrysler’s failed attempt to merge with Renault, but resumed again over the summer.
In recent weeks, Mr. Tavares approached Fiat Chrysler with a plan to merge the auto makers—a goal that long eluded both Mr. Ghosn and Fiat Chrysler’s former CEO, Sergio Marchionne, who died in 2018.
While those auto executives were famous workaholics—jetting around the world to make factory visits—Mr. Tavares is a strict practitioner of work-life balance. His workday generally runs from 8 a.m. to 6:30 p.m., and he makes calls on the drive home before taking the evening off.
He spends many of his weekends at the track, racing cars and competing in events like the 24-hour Le Mans Classic. Last year, he ended that race by spinning off the track in his Lola T70, a classic British race car, before colliding with another car.
“I’m in favor of a life in which you’re not bored to death,” he told motor racing publication Endurance-Info afterward.
Mr. Tavares studied engineering in Paris before joining Renault in 1981 as a test-driving engineer.
He quickly climbed through the ranks. After a stint in the vehicle-development unit of Renault SA ’s alliance partner, Nissan Motor Co. , Mr. Tavares took charge of the Japanese auto maker’s operations in North and South American. There he increased U.S. market share a full percentage point to 8.2% at the height of the recession that followed the 2008 financial crisis. That positioned him to return to France as Mr. Ghosn’s No. 2.
But Mr. Tavares bristled in Mr. Ghosn’s shadow, telling Bloomberg News in 2013 his boss was “here to stay” and musing about running General Motors Co.
“Why not GM?” he said. “I would be honored to lead a company like GM.”
What should Mr. Tavares’s priorities be following the merger? Join the conversation below.
Months after he left Renault, Mr. Tavares took over at Renault’s rival in France: Peugeot. At PSA, Mr. Tavares took a page out of Mr. Ghosn’s playbook by cutting costs and maintaining a sharp focus on key metrics. Mr. Tavares himself was known for flying on budget airlines rather than the private jets used by many auto titans.
PSA quickly returned to profitability, and Mr. Tavares got to work making the company bigger.
In 2017, Mr. Tavares increased PSA’s share of the European market with the acquisition of Opel and Vauxhall from General Motors, which sold after years of losses.
A review of Opel’s costs compared with PSA’s was revealing: At some of Opel’s German manufacturing plants, costs were around double that of PSA’s French plants. That sparked a strong reaction among Opel employees who felt challenged to do better, Mr. Tavares said in an interview at the time.
“First they got scared and then they got excited,” he said.
As well as cutting jobs and pushing further into electric vehicles, Mr. Tavares accelerated plans to shift production to the French car maker’s technology, allowing the larger car group to save money by building Peugeot, Citroën, Opel and Vauxhall models with the same equipment and parts.
Last year, Opel reported a 4.7% operating margin, marking its first profitable year since 1999.
Robert Peugeot, who heads the Peugeot family’s investment firm, said recently, “I was flabbergasted to see how fast the recovery was achieved.”
Write to Nick Kostov at Nick.Kostov@wsj.com
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An employee in a branded helmet is pictured at Saudi Aramco oil facility in Abqaiq, Saudi Arabia October 12, 2019.
Maxim Shemetov | Reuters
Saudi Arabia's Crown Prince Mohammed bin Salman on Friday agreed that the initial public offering of state oil giant Aramco will be announced on Sunday, five sources familiar with the matter told Reuters.
The world's top oil company will announce its intention to float on Nov. 3, the sources said.
"The crown prince finally gave the green light," one source said.
Aramco declined to comment.
Saudi Aramco officials and advisers have held last-minute meetings with investors over the past few days in an attempt to achieve as close to a $2 trillion valuation as possible ahead of an expected listing launch on Sunday, according to sources.
The final meeting by the Saudi government on Friday evening was to decide whether to go ahead with the listing.
To achieve $2 trillion, in the largest IPO in history, Riyadh needs the initial listing of a 1%-2% stake on the Saudi stock market to raise at least $20 billion-$40 billion.
The listing is the centerpiece of the crown prince's plan to shake up the Saudi economy and diversify away from oil. But there have been various delays since it was first announced in 2016.
Prince Mohammed wants to eventually list a total of 5% of the company. An international sale is expected to follow the domestic IPO.