BY ROB COX AND PETE SWEENEY
Saudi Arabia’s Mohammed bin Salman is a
crown prince in a hurry. Besides detaining members of his family in a
corruption sweep and painting a high-tech vision of the kingdom’s future, the
young ruler-in-waiting is also planning to sell a chunk of the national oil
company, Saudi Aramco, to international investors. For that to proceed in 2018,
he’ll need to choose a venue besides Riyadh for the listing early in the year.
China looks like the best option.
Setting aside questions about Aramco’s
value, which the crown prince himself has pegged at an ambitious $2 trillion,
there are hurdles to bringing what’s likely to be the world’s largest
corporation to more traditional marketplaces.
Start with London. Britain is bending over
backwards to bring Aramco to the London Stock Exchange. Prime Minister Theresa
May and then-LSE chief Xavier Rolet traveled to Riyadh and lobbied Aramco’s
chairman for the business in April. Over the summer, the Financial Conduct
Authority proposed to twist its rules to create a new listing category for companies
controlled by sovereign states. Amid some resistance, the rules have yet to be
finalized.
There’s also an additional wrinkle. The
LSE’s biggest shareholder is the Qatar Investment Authority, the sovereign
wealth fund of that country’s al-Thani monarchy. Yet Saudi Arabia launched a
trade and economic boycott of Qatar in early 2017, alongside other Gulf
nations. The crown prince, in an interview with Reuters Breakingviews in
October, called Qatar’s investment a “very, very, very small issue.” But that
still signals it’s an issue.
New York has a different problem. President
Donald Trump took to Twitter in November to extol the benefits of a U.S.
listing. But Saudi Arabia could fall foul of the U.S. Justice Against Sponsors
of Terrorism Act, or JASTA. The law passed by Congress in 2016 would allow
Americans to sue the Saudi government for damages, on the alleged grounds it
helped to plan the 2001 attacks on the World Trade Center and the Pentagon.
Aramco’s New York presence would make it the biggest target for the plaintiffs’
bar in American legal history.
Chinese
backup
All of which raises the possibility of Hong
Kong’s role in Aramco’s future. The Chinese city is morphing from a mere
back-up plan to a potential front-runner among the deal’s backers.
One reason is flexibility. Though the Hong
Kong exchange would need to bend some rules to allow Aramco to list, Chief
Executive Charles Li is loudly signaling his eagerness. He’s pushing a new
program called “Primary Connect,” which would allow mainland Chinese investors
to buy into initial public offerings in the special administrative region’s
exchange. Li says that’s “key” to closing the Saudi float.
Even without the Connect – which would
require Beijing’s approval, too – the exchange has other advantages. Hong Kong
Exchanges and Clearing is a for-profit company trading publicly in Hong Kong,
which regulates listings on the very board on which its own stock trades. It is
in its business interest to grant the oil giant an exception to its requirement
that companies list a minimum of 25 percent of their stock – something that
would instantly render Aramco the largest member of the Hang Seng Index by a
margin of around $200 billion.
A 5 percent free float would be easier to
swallow. At $100 billion, it would leave the company adjacent to insurer AIA,
politely leaving mainland tech champion Tencent in first place. Exchange
executives would have to deem the Tadawul exchange in Riyadh to offer standards
of shareholder protection “equivalent to those provided in Hong Kong,” but that
is unlikely to take long.
The other thing the city can offer is a
roster of Chinese state-owned financial gorillas, potentially ready to invest
on terms that will give the crown prince the valuation he wants – and not too
fussed about transparency. Reuters reported in April that a consortium of
government oil giants like PetroChina and Sinopec, major banks and the $800
billion sovereign wealth fund could be rallied to serve as cornerstone
investors.
If Aramco does choose Hong Kong, it could
signal a political shift. China’s interest in the relationship with Saudi
Arabia is strategic, focused on offsetting American influence in the Middle
East, and on achieving greater leverage over energy prices. It is therefore
likely to ask for a quid pro quo, such as oil-price concessions, supply
guarantees, or even denominating oil contracts in yuan instead of dollars. The
latter could set off unpredictable changes in global energy and currency
prices, and alienate the United States, Saudi Arabia’s primary security
guarantor.
The biggest risk might be embarrassment.
Non-Chinese companies haven’t done too well out of secondary listings in Hong
Kong of late: Swiss miner Glencore and U.S. luxury brand Coach – now known as
Tapestry – took down their tickers in late 2017, blaming tepid turnover. There
have also been numerous scandals surrounding IPOs by mainland firms. If nobody
trades the stock, share prices could struggle to stay in natural sync with the
Tadawul, which is unlikely to see much volume.
No matter the reception in secondary
markets, an Aramco listing in Hong Kong would be rich in irony: a marriage of
convenience between an atheist communist bureaucracy and a monarch from the
theological heart of Sunni Islam – united by a preference for opacity.
First published Dec. 19, 2017
(Image: REUTERS/Thomas Peter)