Here is a safe prediction: Saudi Aramco will soon formally be worth $2tn (£1.5tn), the valuation reputedly craved by the crown prince, Mohammed bin Salman. It could happen by the end of this week.
One can forecast this event with reasonable confidence for two reasons. First, Aramco’s shares rose by 10%, the maximum permitted, on the first day of trading, so the company’s valuation has already advanced from $1.7tn to nearly $1.9tn. There’s only a short hop to go.
Second, vast financial resources have been assembled with the unofficial aim of getting to the round number. Wealthy Saudi families have been encouraged to buy more shares, the Financial Times reported (paywall). Meanwhile, speculating hedge funds will spy a quick turn from buying and then selling once $1.99tn is seen. Index funds are obliged to play since Aramco will soon be eligible for inclusion in the main emerging market indices. There is momentum to get over the line.
Just don’t make the mistake of thinking $2tn will mean Aramco has wowed the investment world with its reserves, operational skill or even dividend-paying capacity. Quite the reverse. This initial public offering is really only a triumph for the investment bankers’ art of making the best of a bad job.
Remember that Aramco was originally trying to sell 5% of itself and attract big international investors. Neither has happened. Only a 1.5% sliver (albeit a big sliver in cash terms) has been sold and the buyers are overwhelmingly from Saudi Arabia and the Gulf, with Abu Dhabi said to be to the fore. These are investors with patriotic or political motives to stay put and the relative lack of liquidity makes it easier to push the notional market value towards $2tn.
There’s no shame in keeping things local, but Riyadh is creating a long-term problem for itself. It still needs to get rid of far bigger chunks of Aramco to fund a diversification of the economy, and international investors will be required eventually.
Those investors, though, are unlikely to be impressed by a stage-managed exercise in pumping up the valuation. If they thought Aramco’s real worth was $1.25tn, or thereabouts, they won’t trust the inflated price. The Saudis will hope scepticism will fade over time, but it’s hard to see why it should: Aramco looks plainly overvalued.
Neither side in the great Tuesday night bust-up in M&C Saatchi’s boardroom can claim the moral high ground.
In one corner, there are the nominal victors, led by the chief executive, David Kershaw, and the chairman, Jeremy Sinclair. They occupy the top jobs in an advertising agency founded 24 years ago by escapees from Saatchi & Saatchi, and they’ve just seen the company’s value collapse by two-thirds in four months because financial controls weren’t up to scratch. Other bosses at other companies have been ditched for less, even when they’re co-founders.
In the other corner stand the crew that resigned: Maurice Saatchi, a more famous co-founder, plus the entire collection of non-executives – Michael Dobbs, the author of the novel House of Cards, Sir Michael Peat, a former principal private secretary to the Prince of Wales, and Lorna Tilbian, a former media guru at Numis, the City firm that still serves as M&C Saatchi’s adviser.
Dobbs, Peat and Tilbian aren’t blameless because they comprised M&C Saatchi’s audit committee. Peat, in particular, should be squirming with embarrassment about the £11.6m of “accounting misstatements” because he’s a former KPMG partner. As for Saatchi, it’s his name above the door, so he had more at stake than just his shareholding. He could have insisted years ago that the non-execs weren’t outnumbered in the boardroom.
Forced to choose, though, one has to conclude that the wrong side won the showdown. Key executives should walk the plank first when things go spectacularly wrong. The non-execs were right to make that demand. It is also why the positions of Kershaw and Sinclair still look untenable in the medium term. Any self-respecting set of non-execs, old or new, would expect a clear-out.
The Competition and Markets Authority’s logic is convoluted: even though Amazon doesn’t really compete with Deliveroo at the moment, an investment could still harm competition.
There are two arguments here. First, Amazon did experiment with delivering fast food and might do so again if it were not distracted by the chance to grab a slice of Deliveroo. Second, both companies already provide an “ultra-fast” grocery convenience service and, even though the market is currently tiny, it might be big one day.
A bit speculative? Yes, but let’s not complain. Amazon has form in squashing competition and the regulator is right to be suspicious.