Saudi Aramco IPO should be judged by its impact not its valuation

06 November 2019
Numerous projects in Saudi Arabia are positioned to benefit from the proceeds of the IPO as they move into construction in 2020

Saudi Aramco officially announced on 3 November its historic decision to list shares on the Saudi Stock Exchange (Tadawul).

The initial public offering (IPO) is widely accepted as the largest ever. When the intention to list was first revealed by Crown Prince Mohammed bin Salman bin Abdulaziz al-Saud in early 2016, he gave the company a valuation of $2tn. Since then, a myriad of estimates have valued the company, with most now expecting a valuation of $1.5tn-$2.3tn.

While the valuation will continue until the company debuts on the Tadawul, the more important issue for Saudi Arabia is the ultimate impact of the IPO.

The plan is for the proceeds of the IPO to go to the Public Investment Fund (PIF), which is the government’s shareholder in Aramco.

PIF has been tasked with delivering a wide range of projects in the kingdom across multiple sectors. These will boost the economy with construction activity as they are built and, in the longer term, create jobs in sectors such as tourism, industry, entertainment and media.

The portfolio of projects includes Neom, The Red Sea Project, Amaala and Qiddiya, as well as the development of renewable energy schemes. After two to three years of planning, these projects are moving into the construction phase, which requires a major uptick in investment.

If the proceeds of the Aramco IPO are invested as planned and become a catalyst for broader development, then the long-term value of the listing will greatly outweigh any potential disappointment in the company’s valuation.

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