The Saudi Arabian government and Saudi Aramco have now made it pretty clear that they have backed away from their initial enthusiastic solicitation of foreign investors for the oil company’s IPO. We do not know if this is because the government and company decided to focus on Saudi investors alone, because they fear complying with international standards for public trading and foregoing some control or because they are just not hearing the excitement they wanted from foreign funds. In any case, the potential for non-Saudi investment in the coming IPO seems to be fizzling. But for funds willing to take a risk, there is a potential upside for a short-term investment strategy.
News has now broken that Aramco has canceled plans for international roadshows. Already, Aramco was taking actions that showed less enthusiasm for foreign investors, such as holding an important announcement on a Sunday and in Arabic only. Moreover, Aramco announced in its prospectus that its shares will only be for sale with Saudi riyals and that the dividend paid to public investors will come in riyals. The Saudi government, on the other hand, receives its dividend from the same company in U.S. dollars. On top of that, Aramco is only for sale on Tadawul, the Saudi exchange.
Yet, the price of Aramco may rise post-IPO, and it could rise precipitously. Here is the scenario:
Both the government and the company are pushing the IPO heavily to Saudi citizens. There are advertisements in Saudi Arabia right now that would never be permitted according to U.S. regulations. Some of these ads warn Saudis not to miss out on a chance to triple their investment. It is expected that up to a third of all Saudis will invest in this IPO, often large amounts. The government is pushing wealthy families and Saudi businesses to invest. According to the prospectus, even Aramco itself will buy $1 billion worth of shares to create an employee incentive program.
There is already, and will continue to be, excitement for the IPO in Saudi Arabia. Moreover, in the absolute monarchy, wealthy families and big businesses are being pressured by the government and will need to comply. The retail investors are being incentivized to hold their shares for at least 6 months, and the wealthy and big businesses will be concerned about selling too soon and attracting the ire of the monarchy.
There is a good chance there will be particularly low volume in the hours, days, weeks and even months following the IPO. Not enough Saudis will be selling. The king and the crown prince do not want this IPO to be a failure, so they will push for the price to rise, perhaps even using government or PIF funds. Politically, for the monarchy, the rise of the share price—at least early on—must be inevitable.
With low volume, domestic excitement and authoritarian pressure, there could be an opportunity for foreign funds to buy in and then sell before the domestic Saudi population is able to. But those foreign funds would have to sell before the six-month lock up period is over. After that, the government will be free to sell more shares, which it has said it intends to do. Also, after six months, Saudi retail investors will have received the incentives for holding their positions, and some will begin to sell.
Of course, this is just one potential scenario. There is no way to know for sure if the centralized control the Saudi monarchy hopes to exert over this IPO will work and send Aramco’s share price rising in the first few months of trading. But it is what the Saudi monarchy wants.