Saudi Arabia's Crown Prince Mohammed Bin Salman may have lowered his valuation target for Saudi Aramco as it prepares an initial public offering, but some of the world's biggest investors say he's not gone far enough.
Money managers including AllianceBernstein and Frankfurt-based Union Investment Privatfonds believe the energy giant is worth less than the approximately $1.7 trillion that the prince is now said to be willing to accept, down from $2 trillion initially.
They're concerned the Saudi government — which may sell only about 2% of Aramco — won't give enough say to minority shareholders. Regional geopolitical risks, which were underscored when the company's facilities were struck by missiles and drones in September, are also weighing on investors' calculations.
While the bulk of the money is expected to come from Saudi investors as well as China, a failure to attract foreign cash or a slump in Aramco's share price when it starts trading in Riyadh on Dec. 11 could backfire on the 34-year-old prince. The IPO is a key part of his grand vision to open up the kingdom's economy to foreign investment and reduce its reliance on oil.
"If Aramco decides to significantly lower its overambitious valuation expectations and float the company on investor-friendly terms, these will be considered a sign of strength and wisdom rather than weakness," said Slava Breusov, a New York-based senior analyst with the emerging and frontier equities team at AllianceBernstein, which manages almost $600 billion. "A successful IPO is one that makes money for investors, not the one that commands the highest valuation."
Aramco is worth "way below $1.5 trillion," according to Mr. Breusov, who said an analyst from one of the banks arranging the share sale failed to persuade him otherwise at a meeting Wednesday. "I don't think enough discount is assigned to any potential misalignment of interests between minorities and the state."
Oil accounted for more than 60% of the kingdom's fiscal revenue in 2017. Saudi Arabia is the most important member of the OPEC cartel with Aramco pumping about 10% of the world's crude. The IPO money will go to the Public Investment Fund — the sovereign wealth fund spearheading the prince's economic-diversification plans.
"In terms of scale and quality of Aramco's assets, they've got the world's best, bar none," said Dwight Anderson, the founder of hedge fund Ospraie Management. "But the decisions that they make are optimized to achieve the country's objectives, not yours as an individual shareholder."