Saudi Aramco will not join the FTSE 100 stock index if it lists its shares in the UK, strengthening London’s status as frontrunner for a slice of the Saudi state oil group’s initial public offering (IPO).
Saudi Arabia is close to making its long-awaited decision on which international exchange its state oil group will float next year, when it is expected to become the world’s largest publicly quoted company.
Global exchanges (New York, Hong Kong, London) have been locked in a battle for the listing that could value the world’s biggest oil producer at about $1 trillion, according to a Financial Times analysis. No matter where Aramco makes the 5 percent IPO listing overseas, it will also be traded at Tadawul exchange locally. A 5% listing could fetch more than $100 billion and be the largest ever, according to several reports.
Advisers and Saudi officials have favored New York because of its large pool of potential investors. However, in recent weeks lawyers have warned company executives and the kingdom’s authorities that the US poses the greatest litigation risk of any venue, putting the focus on London, reports Financial Times.
But concern has grown that a UK listing would mean the state oil company becoming a member of the FTSE 100 index, making an arm of the Saudi state an automatic holding for millions of pension funds.
Publicly listed companies normally seek inclusion into widely followed indices such as the FTSE because it triggers large amounts of mandatory buying from funds that passively replicate the performance of the indices.
However, advisers to Saudi Aramco say it has not sought index inclusion. Rather, they say, buyers of the shares need to make a conscious decision to invest in an entity that has such close links with the state. Saudi Aramco is the kingdom’s biggest revenue generator and has built schools and hospitals alongside managing the energy sector.
FTSE Russell, the subsidiary of the London Stock Exchange that runs the FTSE 100, stipulates that members of the index must have high-grade “premium” listings and float at least 25 per cent of their shares.
Saudi Aramco has not pushed for a change of these rules, one person said quoted FT.
The state oil group could instead seek a premium listing awarded under Financial Conduct Authority rules, which are more forgiving of smaller “free floats” without demanding inclusion in the FTSE 100.
Saudi Aramco said: “No decision as to listing venue, beyond [Saudi Arabia’s] Tadawul, has been taken.”
Saudi Aramco also recognizes that FTSE 100 membership would distort the blue-chip index, shifting its weighting uncomfortably towards the energy sector, which already includes oil companies BP and Royal Dutch Shell.
Not pursuing inclusion in the index would cut off Saudi Aramco’s access to trillions of dollars of capital. The amount of the global stock market controlled by index funds stands at 34 per cent, according to research by BlackRock.
Although a New York Stock Exchange listing alongside one on Saudi Arabia’s Tadawul has been considered the preferred option, a premium listing on the LSE — alongside a domestic offering — is considered second best, according to documents seen by the FT.
This category of listing still implies the top standards in governance, transparency and accounting practices important for the company. A “standard” listing on the LSE is another option under discussion, the documents show.