regional buyers was a huge comedown... It was a Motel 6 instead of the Four Seasons. Not only would Aramco get less cash – but there would also be no CNBC coverage of MBS ringing the closing bell at the NYSE on the first day of trading. A QUESTION OF VALUATION The bankers who helped MBS fuel his $2 trillion fantasy were excited for what, at a $100 billion deal size, would have been around a $350 million payday. Even shared among two dozen or so banks, that’s a lot. A smaller deal that didn’t include many international investors meant a much smaller payoff for Goldman Sachs, Morgan Stanley, and other big banks. But with some basic math and common sense – and just a bit of insight on MBS’s prior behavior – the fancy Western bankers should have seen it wasn’t going to work. The easiest way to value a company is by comparing its price (market cap) with its earnings, better known as the P/E ratio. Based on Aramco’s 2018 net income, at a (fairy tale) $2 trillion market capitalization, the company would have been valued at a trailing P/E ratio of 18. At a market cap of $1.7 trillion, which is where the company went public, it’s at a P/E of 15. That compares with a 2018 P/E ratio for Exxon Mobil of around 14. Rivals BP and Royal Dutch Shell are valued at 2018 P/E multiples of 13 times and 11 times, respectively. Would it make sense for an investor to pay
and the country’s 33 million people, who was boss. So... bankers had plenty of reasons not to disappoint MBS. As the Financial Times put it in November 2017, “Valuation is another troubling issue for the kingdom... [Mention a valuation of $1 trillion] to MBS only if you are prepared to leave the room quickly. In Riyadh, the accepted figure is double that.” NUMBERS DON’T LIE MBS’s autocratic stranglehold in Saudi Arabia – unfortunately for Aramco’s valuation – doesn’t extend to the portfolio- allocation decisions of international investors. For Aramco to sell $100 billion of shares, household-name global mutual, pension, and hedge funds – the Fidelities, Vanguards, and Bridgewaters of the world – would have to buy in in a big way. But during the early stages of marketing the deal in November, it became clear that international investors weren’t interested at the price level (that is, total company valuation) that MBS wanted. Foreign investors indicated they might be interested in buying shares at prices that would put Aramco’s value in a range between $1.2 trillion and $1.5 trillion. That’s a lot... but it’s a long way (a few Exxon Mobils) from $2 trillion. Rather than reduce the price of his crown jewel deal, MBS cut the international portion of the offering. Selling a 1.5% stake of Aramco for $25 billion on Saudi Arabia’s Tadawul stock exchange to mostly local and
American Consequences
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