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WEEKLY MARKET ROUND-UP – 25/11/19

Saudis pull roadshow leg: Aramco flotation tumbles

Formerly billed as the world’s biggest IPO, the listing of Saudi Aramco is now limping to the barn. Its shares have been given a wide berth by international investors and the company has now been forced to pull the planned UK leg of its investor roadshow.

Saudi’s crown prince, Mohammed bin Salman, had (somehow) hoped the deal would deliver a valuation of $2trn (c£1.5trn) or at least twice that of companies like Apple or Amazon. In reality, based on its IPO, the valuation is now much closer $1.6trn.

The company will float a meagre 1.5% of its shares on the Riyadh stock exchange next month after it abandoned a target of 5% at the roadside along with the prospect of listing on an overseas exchange. Meanwhile, the kingdom’s banks have been instructed to issue billions in margin loans to ensure the deal gets away. An updated prospectus now targets just over $25bn, which would just beat Alibaba’s record 2014 IPO.

International investors have steered clear due to the declining appeal of oil assets – especially those owned by absolute monarchies – during an era of rising ESG concerns. The clumsy embassy murder of Jamal Khashoggi last year, a recent crackdown on female activists and a human rights record from the Crusades have also hindered the deal as have the innate geopolitical tensions of the region.

This was illustrated in September when a sophisticated aerial drone attack on its refineries was blamed on local sheep herders. Others have fretted over poor corporate transparency and signs that the government intends to control output and set dividends below those of other oil majors.

‘No fossils’ says EIB

The European Investment Bank (EIB), which last year loaned €55.6bn making it one of the world’s biggest public lenders, will no longer finance fossil fuel projects from the end of 2021 in an effort to combat climate change. Its ban on such projects has been postponed a year due to EU lobbying.

As portfolio manager Hinesh Patel explains, “This is a great headline at a time when the EU is anxious to bolster its green credentials. Energy projects will now need to show they emit under 250g of carbon dioxide per kilowatt-hour of energy produced.

“This is a shot in the arm for new energy technologies,” he says, “but it’s likely to create numerous problems as we’re far from kicking our addiction to fossil fuels. If other institutions follow suit, it could trigger unintended consequences in parts of the energy sector with costs and geopolitical tensions rising dramatically.”

Superpower enters ‘streaming wars’

Last week saw the launch of the Disney+ streaming app hard on the heels of the recent launch of Apple TV.

Within hours of its debut on Tuesday, Disney had 10m new subscribers anxious to stream its massive catalogue of Star Wars, Marvel, Fox and Disney classics. The deluge caused technical difficulties on day one but saw the shares surge over 7% the following day, their biggest gain in a decade.

After years in the doldrums, four key acquisitions have driven Disney shares up around 450% in the last five years. Disney acquired Pixar in 2006, Marvel in 2009, Lucasfilm in 2012 and 20th Century Fox in March this year.

To date, it’s banked c$11bn from Pixar hits and over $18bn from Marvel although Lucasfilm is seen as the biggest cash cow.

Red peril for BT

Shares in BT stumbled last week as the Labour Party announced plans to partnationalise it to provide free broadband, should it win the election on 12 December.

Proposals to nationalise BT’s Openreach network and parts of BT Technology, BT Enterprise and BT Consumer, surprised everyone with BT shares initially falling 3.7% last Thursday (14 November).

Labour estimated the cost of nationalisation to create a “British Broadband” service would be around £20bn with free broadband to all individuals and businesses by 2030. However, BT’s chief executive, Philip Jansen, argued the cost could end up being more than £100bn.

It follows Labour’s existing plans to nationalise water, energy and rail companies and the Royal Mail, which the Confederation of British Industry estimates would cost around £196bn.

HP not HP with Xerox bid

Shares in the computer maker HP fell around 5% on Monday (18 November) after it rejected a buyout offer of $33.5bn from Xerox Holdings, saying it significantly undervalued HP.

In an open letter responding to the unsolicited proposal, HP said the board of directors had been unanimous in concluding the deal was not in the best interests of shareholders due to the conditional and uncertain nature of the proposal and the potential impact of outsized debt levels.

However, it added that it recognised the potential benefits of consolidation with its smaller rival and that it’s “open to exploring whether there is value” in a potential combination with Xerox.

But it stressed it needed more due diligence and engagement from Xerox before it could “evaluate the merits” of a deal.

Amazon squeezes Spotify

Streaming music service Spotify saw its shares fall almost 5% on Monday (18 November) after online giant Amazon announced that its free music service is being extended to more devices.

Currently the free Amazon Music service, which is supported by ads, is only available through the Amazon Echo device, but it will now be available on iPhones, Android devices and on Fire TV.

Amazon has a range of paid plans for its music service, which is also part of its ‘Prime’ bundle, but it launched a free version of the service for Alexa users in September. This extension could be a direct competitor with Spotify’s “freemium” model.

Spotify’s free ad-supported version is reported to have around 140 million users, which Amazon could now potentially target through its extended service.

Chart of the week

The ‘one with everything on it’: America’s ‘one-percenters’ now hold almost as much wealth
as the US middle and upper-middle classes combined. Meanwhile, the poorest Americans owe
35.7% of all US debts but own just 6.1% of the assets.

If any article in this market update has an effect on your finances and you would like professional advice, then please get in touch.

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