What should retail investors make of Saudi Aramco IPO?

The Financial Conduct Authority (FCA) plans to make it easier for sovereign-owned companies looking to list, which could open the door to Saudi Aramco to float part of its business on the London Stock Exchange (LSE).

On 13 July, the FCA launched a consultation on proposals to make a category for sovereign-owned companies wanting to privatise. That was part of a wider initiative to reform markets in an effort to keep the UK open for business after Brexit.

In March this year the government tasked the FCA with keeping the competitiveness of the UK's financial markets in mind when forming policy.

Saudia Arabia is planning to sell off 5% of national oil company Aramco next year in what is likely to be the world's largest initial public offering (IPO), with a valuation which could reach $2 trillion (£1.5 trillion). The company is the world's largest oil producer, extracting around one in every nine barrels globally.

London is vying with New York for what would be a prestigious listing, and both prime minister Theresa May and LSE head Xavier Rolet travelled to Saudi this year in a lobbying effort.

The UK's listing regime was tightened in 2013 following corporate governance failures in overseas companies controlled by foreign individuals, including ENRC and Bumi. The Serious Fraud Office (SFO) has an ongoing investigation into ENRC and investors will be mindful that they can be burned when participating in such opportunities.

Malcom Graham-Wood, founding partner of HydroCarbon Capital and Interactive Investor's go-to oil guru, says this very much looks like the UK authorities are bending over backwards to accommodate Aramco as a London listing would be a huge coup.

"To me it breaches the rules. But the long and the short of it is people will do everything they can to ensure it happens."

One major problem will be exactly what valuation to put on the company, says Graham-Wood. "It's so much of a one-off business. It's a state-owned oil & gas business in the biggest oil producer in the world. It's so difficult to value - what do you value the business at? Investment banks are trying to put a valuation on it so they can get the deal [for the IPO].

"This is also part of the new plan for Saudi Arabia to move away from its dependency on oil and gas," Graham-Wood continues.

"They're trying to tidy up Aramco and I'm not sure they'll be able to do that. They're trying to get investors." He anticipates nation states such as China, and other institutional investors, wanting to be involved as initial investors, although the listing will no doubt whet the appetite of retail investors too.

"There are so many unknowns as it's a state-owned business. It could have, say, a yield of 10%, which would make it very attractive, but we just don't know."

The proposal will specifically address companies controlled by a shareholder that is a sovereign country, and aims to enable companies, which may the subject of major privatisation transactions to choose the higher standards of premium listing, rather than standard listing.

Andrew Bailey, FCA chief executive, says regulatory protections for investors lie at the core of the listing regime. "However, it is important that these protections remain well-targeted. Refining the listing regime in this way would make UK markets more accessible whilst ensuring that the protections afforded by our premium listing regime are focused and proportionate.

"Sovereign owners are different from private sector individuals or companies - both in their motivations and in their nature. Investors have long recognised this and capital markets are well adapted to assess the treatment of other investors by sovereign countries."

The regulator also proposes this new sovereign segment of the premium listing regime would apply to depositary receipts. This would allow a state-backed company to have a primary listing in its domestic markets, and then achieve a premium UK listing through the sale of these secondary securities, providing that underlying voting rights are passed on to the UK investor.

It's not clear at this point whether UK investors would be able to buy shares directly in Aramco or would receive depositary receipts.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.