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How Riyadh's ambitions in Saudi Aramk were foiled

Some of the world's largest investment bankers gathered on Saturday in Riyadh Palace to present their final recommendations on a project that has been absorbed by the Saudi government over the past few years: an initial public offering of shares in Saudi Aramco.

Financiers were there to meet with Yasser al-Rumayyan, chairman of the state oil company and head of the country's sovereign fund, as well as cabinet ministers and company executives.

Their message would have disappointed the owners: international investors did not want to buy shares of Saudi Aramco somewhere near the $ 2 trillion valuation that the mighty crown prince of the kingdom, Mohammed bin Salman, had long been looking for. No amount of sweeteners – from promises of higher dividends to premium shares for local retail investors – has been able to change this reality.

At the heart of Prince Mohammed’s economic reforms, an IPO was once seen as a mechanism to raise $ 100 billion from a 5 percent sale of shares and help open up the Saudi economy to foreign investors. Not only the size of the listing was reduced, but also its scale, as well as any plans for placement on international exchanges.

Pursuing repeated delays since Prince Mohammed first announced his intention to place shares in Saudi Aramko almost four years ago, the heir, who appeared in September, appointed Mr. Rumayan responsible for the IPO process, overthrowing the kingdom’s influential oil minister, who was seen as an obstacle to listing.

The kingdom’s highest authorities then pushed for the withdrawal abroad in December for the exchange of Tadawul in Riyadh.

Bankers gathered in the capital of Saudi Arabia presented the group with what they thought was a moderate offer to make a deal and help maintain confidence in Prince Mohammed without violating his ambitious economic reforms.

Only a few bankers from the nine global IPO coordinators were selected to provide their recommendations: Soofyan Zuberi from Bank of America, Tyler Dixon from Citigroup and Henrik Gobel from Morgan Stanley. Others, such as Mike Duffy of Goldman Sachs, were thrown into the hallway. Banks declined to comment.

“There were basically two options – an international deal worth 1.5 trillion. USD., Which could be increased to 1.6 trillion. USD., Or a local version worth 1.7 trillion. Dollars. ”Said one of the participants in the meeting.

The nerves of the bankers were already tense after they were left to wait five hours, taking time, chewing sandwiches and sipping juice with their rivals.

The meeting with Saudi officials lasted only 10 minutes.

Bankers were forced to go to their homes, from Riyadh to Europe, not knowing what the country's top authorities decided.

Despite many years of overcoming the obstacles to winning a business from Prince Mohammed, the sovereign Public Investment Fund and Saudi Aramco, advisers only heard about this decision on Sunday morning.

It was then that Saudi Aramco announced its 1.5 percent sale at a price that would value its shares at 1.6-1.7 trillion. Doll. The United States would have grown only to 25.6 billion. Dollars. USA.

Plans to sell shares directly in the US, Europe and Asia have also been revised. The IPO will be focused on investors from Saudi Arabia and the Persian Gulf.

“Rumayan must have thought:‘ Why do we want to transfer our crown jewel to these internationals? [for a lower valuation] when we could sell it to our people, ”the person said.

But it was known that in the end, "all decisions come from MBS" – a reference to the crown prince.

Some foreign institutions can still invest, but through limited channels. Given the limited distribution, some advisers working for dozens of banks on the deal now question their purpose. Collective bank fees from IPOs that are not yet disclosed are also likely to be much lower than expected.

Anxiety about weaker valuation forecasts coming from potential investors was raised a few weeks before the decisive Saturday meeting in Riyadh.

At an earlier appraisal meeting with Mr. Rumayan a few weeks ago, bankers passed a consensus of 1.1–1.5 trillion. Doll. US received from initial investor meetings in the USA, Asia and Europe.

“Rumayan did not hear anything after he heard 1.1 trillion dollars,” the man said. "He's crazy."

His annoyance was caused by rainbow estimates of banks in the amount of 2 trillion or more when they applied for a mandate earlier this year, only so that they would later lower these numbers after feedback from potential shareholders.

Dividend yield is lower than that of other traded energy groups, management issues, concerns about the security of energy infrastructure after attacks on key facilities in September, as well as broader government intervention in corporate strategy were among the constraints on fund managers.

Workers are waiting in front of a billboard advertising the state oil giant Saudi Arabia Aramco with Arabic inscriptions:

There has been a patriotic surge in interest in Aramco listing across the country and throughout the region, where there are fewer security and governance issues © Amr Nabil / AP

A similar message was transmitted only last week. According to two people familiar with the process, there was a large gap in demand between domestic retail investors and foreign institutions.

By this time, one global coordinator, deciding to adopt a more “realistic” approach, lowered his estimate to 1.1–1.2 trillion. “They were destroyed [by Mr Rumayyan]“Said the man.

Choosing the option “first at the local level”, Saudi Aramco and his advisers canceled global road shows designed to attract the world's leading fund managers.

Instead, they will sell mainly to retail shareholders in the kingdom, Saudi foundations, and regional investors in upcoming meetings around the Persian Gulf, with the exception of Qatar, which has been embargoed for more than two years by a quartet led by Saudi Arabia.

The list will largely depend on interest from local investors, some of whom were involved in the anti-corruption campaign of Prince Mohammed in 2019 and currently rely on investment in the deal.

There was also a patriotic surge of interest in the deal throughout the country and throughout the region, where there are fewer security and governance concerns. Domestic banks promise to generously lend to investors wishing to purchase shares.

Saudi Aramco also appealed to government investors, including sovereign funds in Abu Dhabi and Kuwait, as well as other state-owned firms in Russia, China and Malaysia, which could still create additional demand, so the issue could break the record $ 25 billion collected by the Chinese Alibaba. back in 2014.

“I think that they will be re-signed 2-3 times,” said one regional investor, who places up to $ 5 million during an IPO. And yet this was not enough to satisfy the once high ambitions of the Saudi authorities.

Saudi Aramco said that "the IPO remains open to international investors outside the United States."

Due to the fact that international banks now look at listing less favorably, consultants now include each other. One of them accused the competitor of “wandering around the price range”, while others spread stories about how peers were attacked by Saudi officials.

Another banker said: “There is real tension in the syndicate. “These deals are becoming dynamic, and everyone is turning to each other.”

Seeing the prospect of the disappearance of many years of work beyond the horizon, they are increasingly philosophical about the degeneration of the transaction into what one banker called "Greek tragedy."

“Advisers advise, decide decision makers. They should listen to the advice or ignore it, ”said another person informed about the process. "Just."

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