Saudi Aramco may create employee shareholders says US think tank

23/03/2018 07:39 AST

Saudi Aramco could grant shares to employees in any forthcoming initial public offering, according to an analysis of the company charter it adopted at the beginning of the year.

The new charter also allows Aramco to issues different classes of shares, with the possibility of preferred stock paying higher dividends but with fewer voting rights, the analysis shows.

The revelations about the new corporate set-up at the Kingdom's leading company, and the biggest oil exporter in the world, come in a paper for the Arabia Foundation, an American think-tank based in Washington DC, by Ellen Wald, non-resident scholar at the foundation and author of the forthcoming book "Saudi Inc."

Wald and a team at the Foundation have translated and analyzed the charter document - previously available only in Arabic from Aramco - and highlighted what it means for the forthcoming IPO, which could be the biggest in history.

In addition to the provisions on employee and preferred shares, the analysis of the charter, adopted in January, highlights the fact that plans for the IPO are progressing and that Aramco plans to list shares on domestic and possibly foreign exchanges "in the near future."

It spells out that Aramco's future remains within the sectors of energy and petrochemicals, and will not become an arm of the Saudi government operating in wider industries.

It also outlines levels of protection for investors against state influence on the company, though concluding that "the state will have overwhelming influence on the board."

An Aramco spokesman said he believed the analysis to be based on an accurate translation of the Arabic document. He added that there was no obligation on Aramco to publish an English version, though this might be available later.

The paper will add further fuel to the debate about the forthcoming IPO and its place within the Vision 2030 strategy to diversify the Saudi economy away from oil dependency.

Wald said: "Significantly, the charter provides insight into the future Aramco initial public offering and the ways it will benefit the Saudi economy and Saudi people during and after the state-led economic transformation. Although the charter does not directly inform on Aramco's potential valuation, it raises important questions for future valuation."

The implications for around 55,000 current Aramco employees - most of them Saudi citizens - will be significant. "Providing Aramco stock to Saudi employees of Aramco could infuse the economy with cash from diffuse sources. This would decentralize wealth, increase commercialism (and private spending), raise real estate values, and perhaps encourage domestic investment in local small businesses. This infusion of wealth into private hands in Saudi Arabia, coupled with private and pension-plan purchases of Aramco stock, would mean that a large portion of Saudi Arabia would acquire a personal stake in the success and future of the largest company in the Kingdom," Wald said.

"The opportunity for Saudis to own shares in Aramco would be an important contribution to the overall economic transformation of Saudi Arabia, which is currently a primary aim for the Saudi government. The government's economic transformation plans are, in part, designed to incentivize the people to take a larger stake in their own economic futures," she added.

The provisions on what kinds of shares can be offered in any further IPO could also have an effect on the eventual valuation of the company. "Although the charter only specifies one class of common stock, Aramco may offer a second class of preferred shares in the future. Preferred shares would limit voting rights but increase dividends, potentially indicating a higher valuation for Aramco while maintaining state control over the Aramco board," Wald said.

The issuance of preferred shares would require a special shareholder meeting to approve the conversion of common shares. "Preferred shares do not confer shareholder voting rights to the shareholders, but preferred shares do grant a higher share of the net profit of the company. In other words, preferred shares would offer a higher dividend, if the company creates them," said Wald.

Higher dividend shares would affect the valuation of the company, which has also been a matter of debate. Some observers have suggested Aramco might struggle to make the $2 trillion estimate put on it when the IPO plans were announced two years ago.

Arab News