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2017-07-13 14:26:02
Britain Aggressively Courts $2 Trillion Saudi Aramco Listing

LONDON — London and New York have been battling for months over what could be the biggest public offering in history, Saudi Arabia’s state energy company Saudi Aramco.

Britain looks to be working hard to land it, with regulators unveiling proposals on Thursday that aim to make it easier for state-owned companies to list on the London Stock Exchange.

Though the Financial Conduct Authority of Britain did not explicitly name the Middle Eastern energy giant when it published the potential new rules, the implication is clear.

Saudi Arabia wants to list 5 percent of Aramco, at a valuation of around $2 trillion, a blockbuster listing that has set stock exchanges around the world competing against one another. Analysts say the final decision is likely to come down to London and New York.

The fight for Saudi Aramco’s listing is well underway.

The Financial Conduct Authority has proposed creating a new category of premium listings specifically geared toward state-owned companies.

The bottom line: Any interaction between public sector firms and the sovereigns that control them will not require approval by other shareholders.

“Sovereign owners are different from private sector individuals or companies — both in their motivations and in their nature,” Andrew Bailey, the conduct authority’s chief executive, said. “Investors have long recognized this, and capital markets are well adapted to assess the treatment of other investors by sovereign countries.”

The regulator has called for feedback, before issuing more detailed proposals.

In a word: oil. Saudi Aramco produces more of it than any other company — an average of 10.5 million barrels per day last year — and claims reserves equivalent to 15 percent of the world’s total. It also has a large and modern global oil refining network.

Crown Prince Mohammed bin Salman, the driving force behind the public offering, has said that it could value the company at $2 trillion. While other estimates have been lower, in the range of hundreds of billions of dollars, that would still be a mammoth sum.

The value of the offering is likely to depend on several factors, from the price of oil to the taxes that the government applies to Saudi Aramco’s revenues. (The government slashed the company’s tax rate in March.)

Ultimately, though, it will all depend on confidence in Saudi Arabia’s economy and the kingdom’s stability. Investors considering purchases of Aramco shares will need to take into account how closely intertwined the company is with the government’s economic and political strategies.

For instance, Aramco sells all of the natural gas it produces to domestic customers at below market prices that underpin the country’s industrial base.

The price of oil is crucial because it is a critical variable in determining the value of future Saudi cash flows.

Riyadh had been keeping production high to squeeze out lower-cost oil producers. But some analysts believe the kingdom agreed to trim production late last year not just to lift oil prices but also because of worries that a low price would affect the I.P.O. valuation. In a worst-case scenario, sustained low prices could force Saudi Arabia to postpone, or even abandon, the public offering.

There are other effects. In a paper published this year, Bassam Fattouh, the director of the Oxford Institute for Energy Studies, wrote that low oil prices could mean that the reduced tax rate on Aramco “may not be sustainable” — such a combination would deprive the government of much-needed funds for social and development spending.

Investors might recognize this problem and lower their calculations of the value of Aramco’s cash flows, according to Mr. Fattouh, who is close to the Saudi energy leadership.

Listing in New York would give Saudi Aramco access to what is seen as the biggest market in the world, with the investor capital available to support trading in such a huge company.

Debuting on the New York Stock Exchange also carries with it the prestige of a listing on the Big Board, and market debutantes still ring the bell on their first day of trading.

But concerns remain about a New York listing.

In particular, an I.P.O. in the United States would leave Saudi Aramco more vulnerable to lawsuits in American courts. Last year, for instance, Congress voted to allow victims of the Sept. 11 attacks to sue Saudi Arabia in courts in the United States.

Shareholders in American companies also frequently file lawsuits against companies for perceived regulatory violations.

For now, nothing has been announced.

Much still remains unresolved — the listing is not expected before next year, and the company has not yet chosen all of its bankers.

It is worth noting that Saudi Aramco is likely to be listed on its home country’s exchange, the Tadawul. But the kingdom is still deciding between London and New York.

The New York Stock Exchange had reportedly been favored for its deeper pool of available capital and its prestige.

Whether the proposals announced in Britain on Thursday sway Aramco, though, is so far unclear.