Saudi eco­nomic re­forms, and the fees they’ll gen­er­ate, draw a pack of hun­gry in­vest­ment bankers

Saudi Ara­bia’s eco­nomic re­forms have bankers look­ing to cash in “Banks are see­ing a big wal­let to go af­ter” in the Mid­dle East

Bloomberg Businessweek (Asia) - - CONTENTS - −Ste­fa­nia Bianchi and Matthew Martin

When news broke in Jan­uary that Saudi Ara­bia was con­sid­er­ing an ini­tial pub­lic of­fer­ing of its sta­te­owned Saudi Ara­bian Oil Co., or Saudi Aramco, the first re­ac­tion among Wall Street’s top brass was shock. Then the calls be­gan pour­ing into Dubai—the Mid­dle East’s fi­nan­cial hub—from ea­ger bankers in Lon­don and New York.

In­vest­ment bankers around the world are clam­or­ing to get in on what prom­ises to be a bo­nanza of fees—and not just from the Aramco IPO, which the Saudis are hop­ing val­ues the com­pany at up­ward of $2 tril­lion. The king­dom is plan­ning to sell hun­dreds of smaller state as­sets to bol­ster its fi­nances and re­duce its de­pen­dence on oil. That in­cludes sell­ing as much as $15 bil­lion of bonds.

“It’s go­ing to be a fees feast for in­vest­ment banks,” says Riyadh-based John Sfakianakis, head of eco­nomic re­search at the Gulf Re­search Cen­ter. “No one else in the Mid­dle East, and maybe even emerg­ing mar­kets glob­ally, is em­bark­ing on such deep re­forms.”

The Aramco IPO alone could gen­er­ate at least $50 mil­lion in bank­ing fees, ac­cord­ing to an es­ti­mate from New York-based re­search firm Free­man & Co. With in­vest­ment bank­ing in a slump across much of the world, Saudi Ara­bia looks even more promis­ing. “Saudi Ara­bia is close to the top, if not at the top, of the agenda for banks,” says Christo­pher Wheeler, a Lon­don-based an­a­lyst with Atlantic Eq­ui­ties. “Where else is there at the mo­ment?”

Fees paid to banks in Saudi Ara­bia jumped by al­most a third, to about $100 mil­lion, in the first five months of the year, ac­cord­ing to Free­man. 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 in­creas­ing head count, dis­patch­ing top ex­ec­u­tives to Riyadh, and pro­mot­ing Saudis to se­nior roles to gain in­flu­ence. Among the big­gest banks, HSBC and JPMor­gan Chase ap­pear to have a head start. Both banks, along with Cit­i­group, have been tapped to ar­range the king­dom’s first in­ter­na­tional bond sale later this year, ac­cord­ing to peo­ple familiar with the se­lec­tion process. HSBC is al­ready work­ing on the pri­va­ti­za­tion of the Saudi Stock Ex­change, as well as the po­ten­tial breakup of Saudi Elec­tric­ity, say peo­ple with knowl­edge of the mat­ter. Stuart Gul­liver, HSBC’s chief ex­ec­u­tive of­fi­cer, vis­its the king­dom reg­u­larly, ac­cord­ing to some­one familiar with his sched­ule.

JPMor­gan ad­vised Saudi Ara­bia’s Pub­lic In­vest­ment Fund on its $3.5 bil­lion in­vest­ment in Uber this month. It also has an ad­vi­sory role on the Aramco IPO, peo­ple familiar with the mat­ter said in April. JPMor­gan set out at the be­gin­ning of the year to in­crease its Saudi Ara­bi­abased staff of 65 by about 10 per­cent, says Bader Alam­oudi, CEO of its lo­cal in­vest­ment-bank­ing unit.

The big banks are vy­ing not just with one an­other but also with smaller com­pa­nies. Verus Part­ners, a Lon­don-based bou­tique firm, in April helped Saudi Ara­bia se­cure its first loan in 15 years, when the govern­ment raised $10 bil­lion from banks. That same month, Bloomberg re­ported that Michael Klein, the for­mer Cit­i­group in­vest­ment banker who runs his own firm, is ad­vis­ing Aramco on its IPO. He’s 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.

To re­duce the im­por­tance of oil to the econ­omy, Deputy Crown Prince Mo­hammed bin Sal­man wants to build the sov­er­eign wealth fund into the world’s largest and in­crease the pro­por­tion of its over­seas in­vest­ments to half, from 5 per­cent—an enor­mous shift that would gen­er­ate enor­mous ad­vi­sory fees. Still, bankers typ­i­cally earn less on deals in Saudi Ara­bia than on sim­i­larly sized trans­ac­tions 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 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,” says Wheeler of Atlantic Eq­ui­ties. “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.”

The bot­tom line Bankers are flock­ing to Saudi Ara­bia, where the IPO of Saudi Aramco could gen­er­ate at least $50 mil­lion in bank­ing fees.

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