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Saudi Aramco IPO: Implications for emerging markets equity index investors

On 3 November 2019, Saudi Aramco launched its long anticipated IPO, intending to float c. 1.5%, raising c. USD 24-26 billion. At projected valuation of USD 1.6-1.7 trillion, Saudi Aramco would likely be the largest listed company in the world.

Overview

On 3 November 2019, Saudi Arabia launched the long anticipated (and several times postponed) IPO of its state oil company Saudi Aramco. The IPO is contingent upon, amongst other factors, successful roadshow and book-building (currently in progress). Saudi Aramco will be listed on the Saudi Stock Exchange (Tadawul). Following a flurry of speculations regarding the estimated company valuation, ranging from as low as USD 1.2 trillion to as high as USD 2.3 trillion, on 17 November 2019, Saudi Arabia announced an offer price range for Saudi Aramco of SAR 30-32 (USD 8-9), implying total company valuation of USD 1.6-1.7 trillion. Although valued towards the lower end of the initial valuation estimates, Saudi Aramco is still on route of becoming the largest listed company in the world (the largest listed companies at present, Apple and Microsoft, have current market capitalisation of USD 1.2-1.1 trillion, respectively).

Index impact

Saudi Arabia plans to float 1.5% of the total share capital of Saudi Aramco, raising c. USD 24-26 billion. Should Saudi Aramco meet the relevant index eligibility criteria (more on this below), it would have an estimated weight in the major emerging markets market capitalisation weighted indices of c. 0.4-0.5%, ranking amongst the top 30 largest index constituents. Based on data sourced from index providers and industry data points, an estimated Saudi Aramco index weight of c.0.4%-0.5% would imply aggregate demand by index funds of c. USD 2.0-4.0 billion.

Share allocation

Two groups of investors are allowed to subscribe to shares in the IPO: institutional and individual. Individual investors comprise nationals of Saudi Arabia and other Gulf Cooperation Council (GCC) countries. Of the 1.5% float, up to 0.5% is targeted at individual investors. This would imply at least 1% (USD 16-17 billion) allocation to institutional investors, including index funds. Individual investors only are being offered an incentive to hold the shares for at least six months after listing, at which point they will receive one share for every ten shares they hold.

Index providers stance

Initial indications suggest that the company would likely be included in the relevant equity market capitalisation equity indices, subject to meeting all index eligibility criteria, as noted below.

  • MSCI: Saudi Arabia is a constituent of MSCI Emerging Markets Index (2.4% current index weight). If Saudi Aramco meets all of MSCI's index eligibility criteria (including size, foreign room, limitations on investment opportunities available to international institutional investors), it would likely qualify for early index inclusion. Early inclusions in MSCI indices following IPO are typically effective after the tenth trading day. Given the proximity of the projected IPO timeline to the Christmas and New Year market holidays, MSCI would potentially add Saudi Aramco to MSCI EM Index no later than close of 17 December if Saudi Aramco starts trading on or before 12 December, but would postpone its inclusion until after 5 January 2020 if the IPO listing date is after 12 December. Treatment in MSCI derived equity indices differ. In MSCI ESG market cap weighted indices (e.g. ESG Leaders, SRI), the company will be included only if it meets all ESG/SRI index eligibility criteria – based on current MSCI ESG Research, the company is not eligible for inclusion. In MSCI non-market cap weighted indices (e.g. Minimum Volatility, Multiple Factor, ESG Universal), the company would potentially be considered for inclusion at the next Semi-Annual Index Review. 
  • FTSE Russell: Saudi Arabia is a constituent of FTSE Emerging Index (2.2% current index weight at 0.75 inclusion factor, increasing to 1.00 at the March 2020 index review). If Saudi Aramco meets all of FTSE Russell's index eligibility criteria1, it would likely qualify for early index inclusion. Early inclusions in FTSE indices following IPO are typically effective after the fifth trading day. Given the proximity of the projected IPO timeline to the FTSE GEIS quarterly index review, effective after close of 20 December, FTSE Russell might include Saudi Aramco (at the same inclusion factor of 0.75 currently applicable to other Saudi Arabia constituents of FTSE indices) as part of the quarterly index review.

Next catalysts

Book-building for institutional investors (including index investors) wishing to participate in the IPO provisionally closes on 4 December. Saudi Arabia is expected to announce the final offer price on 5 December, at which point we expect more colour from the index providers regarding their intended treatment of the IPO with regards to index inclusion.

Saudi Aramco IPO: 2019 provisional timeline

  • 3 November: IPO launch
  • 9 November: prospectus issued
  • 17 November: book-building opens
  • 17 November: Saudi Aramco announces it will float 1.5% of its total share capital to investors at an indicative offer price range SAR 30-32
  • 18 November: news resurface that IPO roadshows in the US, Asia, and Europe have been cancelled; implying that marketing of shares would now focus on the local market and GCC countries.
  • 28 November: book-building closes for individual investors
  • 4 December: book-building closes for institutional investors
  • 5 December: final offer price to be announced
  • 11 December: expected IPO listing date (unconfirmed)
  • Potential index inclusion dates (assuming 11 December IPO, and conditional upon Saudi Aramco meeting the relevant index inclusion requirements and index eligibility requirements for fast track entry)
    • MSCI: potential one phase inclusion no later than close of 17 December (if IPO listing date is after 12 December, implementation will be after 5 January 2020). 
    • FTSE Russell: inclusion to potentially coincide with the December 2019 quarterly index review effective close of 20 December, at the same inclusion factor of 0.75 currently applicable to other Saudi Arabia constituents of FTSE indices.

UBS Indexing experience (data as at 30 September 2019)2

  • Over 35 years' indexing experience, USD 351 billion AUM, tracking over 150 indices.
  • Over a decade's experience in managing emerging markets index equity with AUM of over USD 21 billion.
  • Big enough to benefit from economies of scale, but not too big to face liquidity constraints when trading for index changes.
  • Extensive experience and expertise in customising index and rules-based portfolios: more than 50% of our index equity book of business by AUM has a degree of customisation.
  • Building upon the experience of the broader UBS Asset Management: experience in all operational aspects of managing emerging markets mandates.

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