When
news broke
in January that Saudi Arabia was considering
an initial public offering ofits state-owned oil company, the first
reaction on Wall Street was shock. Then calls began pouring into Dubai -- the
Middle East’s financial hub -- from senior bankers in London and New
York.
Investment banks around the
world are clamoring to join what promises to be a bonanza, and not just the IPO
of Saudi Arabian Oil Co., or Aramco,which could be valued at upward of $2
trillion. The kingdom is planning to sell hundreds of state assets to bolster
its finances and reduce its dependence on oil. That includes as much as $15
billion of bonds.
Saudi Arabia looks even
more promising with investment banking in a global slump and Britain’s vote to
exit the European Union set to deter deal-making for months to come.
"Saudi Arabia is close to
the top, if not at the top, of the agenda for banks,” said Christopher Wheeler,
a London-based analyst with Atlantic Equities LLP in London. "Where else is
there at the moment?"
Fees paid to banks in the
kingdom jumped by almost a third to about $100 million in the first five months
of the year, according to New York-based research firm Freeman & Co. While
that’s a fraction of what investment banks generate in the U.S. and
Europe,the work of diversifying the kingdom’s economy is just getting
started.
International banks
elbowing for position are adding staff, dispatching top executives to Riyadh
and promoting Saudis to senior roles. Among the biggest banks, HSBC Holdings
Plcand JPMorgan Chase & Co. appear to have a head start.
HSBC is working on the
privatization of the Saudi Stock Exchange and the potential breakup of Saudi
Electricity Co., people with knowledge of the matter have said.Stuart
Gulliver, chief executive officer of the London-based bank, travels to the
kingdom regularly to meet decision makers, said a person familiar with his
visits who asked not to be identified discussing internal matters.
Influential Roles
Two HSBC bankers recently
jumped to government roles. Mohammad Al Tuwaijri, CEO for the Middle East, was
appointed deputy economy and planning minister in May. Fahad Al Saif, general
manager of global banking and markets at HSBC’s Saudi British Bank, is starting
a debt management office that will be responsible for the kingdom’s first
international bond sale.
HSBC and JPMorgan, along
with Citigroup Inc., were picked just days ago to arrange that offering, people
with knowledge of the matter said. Officials at the three firms declined to
comment on their Saudi operations.
JPMorgan advised the Saudi
Public Investment Fund on its $3.5 billion investment in Uber Technologies Inc.
this month. It also has an advisory role on Aramco, people familiar with the
matter said in April. The largest U.S. bank set out at the beginning of the
year to increase its Saudi staff of 65 by about 10 percent, said Bader
Alamoudi, CEO of its local investment-banking unit, in a January interview.
‘Huge Potential’
Deutsche Bank AG, which has
about 80 people in the country, named Jamal Al Kishi, a Saudi national, as CEO
for the Middle East and Africa earlier this year.
"We view Saudi as a core
growth market with huge potential for global investment banks,” said Tamim
Jabr, Deutsche Bank’s head of corporate and investment-banking coverage in
Saudi Arabia.
Morgan Stanley President
Colm Kelleher, who traveled to Riyadh in May, toldSaudi Arabia’s
al-Eqtisadiah newspaper that his visit was to reaffirm the bank’s commitment to
the Saudi market at a time when the country’s future is being shaped. An
official at the New York-based firm declined to comment.
The big banks arevying
not just with each other, but also with smaller firms.Verus Partners
Ltd., a London-based advisory boutique co-founded by former Citigroup bankers
Mark Aplin and Andrew Elliott, helped Saudi Arabia secure its first loan in 15
years in April, when the government raised $10 billion from banks.
Michael Klein, another
ex-Citigroup investment banker, is advising Aramco on its IPO, people with
knowledge of the matter said in April. Klein’s firm is providing strategic
advice to the government, while JPMorgan is working on preparations for the IPO
and may be among the banks that underwrite the offering, the people said.
To reduce the importance of
oil, Deputy Crown Prince Mohammed bin Salman wants to build the country’s
sovereign wealth fund into the world’s largest, and increase the proportion of
its foreign investments to half, from 5 percent.
"It’s going to be a fees
feast for investment banks,” said John Sfakianakis, the Jeddah-based head of
economic research at the Gulf Research Center, a think tank. "No one else in
the Middle East, and maybe even emerging markets globally, is embarking on such
deep reforms.”
The Aramco IPO alone would
generate at least $50 million in banking fees, according to an estimate from
Freeman.
The kingdom provides a
bright spot in an otherwise dismal landscape for investment banks, whose
earnings are under pressure from record-low interest rates and escalating
capital requirements.U.K.voters’ surprise decision to withdraw from
the EU heralds even harder times for securities firms ascompanies that
hire banks to advise on takeovers and raise money face years of uncertainty
while Britain negotiates new international ties.
Bankers typically
earn less ondeals in Saudi Arabia than on similarly
sizedtransactions elsewhere.On the IPO of National Commercial Bank,
bankers, lawyers and accountants split 25 million Saudi riyals ($6.65 million),
or about 0.1 percent of the deal’s size.That compares with an average of
2.7 percent for banks underwriting IPOs in Europe, the Middle East and Africa
in 2014, data compiled by Bloomberg show.
The country’s rigid
interpretation of Sunni Islam, including a strict segregation of men and women
in public and a ban on alcohol, can be off-putting to expatriates and make it
harder to put qualified bankers on the ground.
Still, the opportunities
are too attractive to pass up.
"Banks are seeing a big
wallet to go after and they won’t want to miss out,” said Wheeler. "With oil
unlikely to return to historical highs, there will be a consistent stream of
business coming out of Saudi Arabia for years to come."
(
Bloomberg)