Our views

Don't deploy emergency floatation devices for Saudi Aramco


Ashley Hamilton Claxton, Corporate Governance Manager

11 October 2017

Taken at face value, a Saudi Aramco initial public offering (IPO) looks like a great deal. Potential investors are being offered the keys to the Kingdom’s most valuable resource, a 5% stake in the machine which has delivered decades of strong revenues, with a recently slashed tax rate and enormous oil reserves.

But wearing a cynical cap, the deal is a rather raw indeed. Investors are getting a minority stake in an oil business with reserves that haven’t been independently verified; at a valuation which some fear is vastly inflated.
The investment case for Aramco will be hotly debated. But this summer, the focus is on whether or not it could or should be listed on the London Stock Exchange.

For non-governance wonks, here’s the lowdown. Typically, to secure a premium London listing and join the FTSE index, a company must offer 25% of its shares to the public, and aspire to meet high governance standards. The listing consultation released by the Financial Conduct Authority (FCA) earlier this month, which proposes a new ‘Premium’ segment for ‘sovereign controlled companies’, will do neither of these. And while the FCA’s proposals do not mention Aramco by name, it is the elephant in the room. Indeed the fine print explicitly states that concessions may be granted to this new segment of sovereign companies if they offer more than £100 million of shares. The FCA seems willing to twist itself in knots to attract the Aramco listing, but at what price?

By removing controlling shareholder rules, independent shareholders will get no say on any transactions or asset transfers between Aramco and the Saudi Arabian government, and very little power to elect independent directors. The silver lining is that without offering up significantly more of the firm on the open market, Aramco will sit outside of normal FTSE indices. This means that the many pension savers with funds which track the market will not become unwilling investors, as some had originally feared.

But in our view, this new segment corrupts the principles of good governance, transparency and investor protections which the UK’s listing rules should safeguard. For the first time, it would formally construct a safe space for firms which want Premium listing status, but are unwilling to play by the rules.  For an example of what can go wrong, investors should recall the consequences when standards were relaxed for previous foreign-controlled listings, such as the Eurasian Natural Resources Corporation (ENRC).

In a post-Brexit future, London seeks to remain at the heart of global finance. Its well-functioning capital markets and rule of law are what attract investors and companies. Deploying an emergency flotation device to get the Aramco IPO underway will not guarantee smooth sailing in the future, and could weaken London’s appeal in the long term.

 

First published in CityWire Wealth Manager on 27 July 2017. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.