Investment banks are jostling to take part in the listing of a chunk of Saudi Arabia’s state-owned oil giant Aramco as a portal to the lucrative deals they expect to flow from the kingdom’s plan to revamp its economy.
The prospect of new business will offer a respite for investment banks, struggling with dwindling revenue as the global economy slows and regulation eats away at their business.
“For banks, being on this (Aramco) deal is a game-changer for the league tables,” said one senior executive at a European bank, declining to be named due to the sensitivity of doing business in Saudi Arabia.
Saudi Arabia’s government released on Monday its National Transformation Plan, a 110-page list of policies and targets for 2016-2020 that aims to wean the economy off its dependence on oil.
It is part of a wider, long-term reform drive known as Vision 2030, announced by Deputy Crown Prince Mohammed bin Salman in April, and it includes the initial public offering of less than 5 percent of Saudi Aramco’s value.
So big is the state oil company because of its rights to the kingdom’s crude reserves, that selling even 1 percent of it would create the world’s biggest IPO, Prince Mohammed said. He expects the IPO will value Aramco at at least $2 trillion.
Generally, government work across the world is poorly paid, but banks often vie for the contracts simply to build a relationship with the state in the hope of getting future business.
“The Aramco IPO of itself is not that interesting to us in terms of business,” said a senior source at a big investment bank, speaking on condition of anonymity. “The fees won’t be great, but it’s about what other business will result.”
Wall Street bank JPMorgan and independent boutique bank Michael Klein have already been picked to advise the country ahead of any listing.
A beauty parade, where banks will pitch for a role, is expected to be held in the coming months to determine what could be a roster of dozens of banks, both international and local, coordinating the share sale.
“We would be doing it for sure in part as it would lead to other things,” a chief executive of a major bank said, speaking anonymously. “If we’re not on it, then it’s a problem.”
Aramco subsidiary companies will also be listed, as will stakes in other publicly held companies, such as the stock exchange. Details in Monday’s plan showed the Energy Ministry aimed to transfer all its power generation to “strategic partners” by 2020 and Riyadh will also privatise its water desalination agency.
Saudi Arabia also signalled it is adopting new strategies to invest is petrodollars, with the $3.5 billion purchase of a stake in U.S. ride-hailing firm Uber, advised by JP Morgan.
So far the market has been modest.
Investment banking in Saudi Arabia has netted banks just $1.75 billion in fees in the last ten years, Thomson Reuters data shows.
In the past decade, banks made the highest fees in 2007, when they shared $391 million, data shows. By comparison, banks working on the acquisition of Mannesmann by Vodafone in 1999, got more than $530 million, the largest-ever fee tally.
HSBC led the rankings in 2015 in terms of highest fees earned in Saudi Arabia, but even at number one, they reaped a mere $22.7 million, Thomson Reuters data shows.
So far this year Deutsche Bank is number one in terms of investment banking fees as well as mergers and acquisitions in Saudi Arabia, having earned $10 million, according to Thomson Reuters data published in June.
“Historically, transactions have been competitively bid out to both local and international banks with the lowest bidder typically winning the mandate,” said Tamim Jabr, Deutsche’s head of corporate and investment banking coverage in Saudi Arabia.
“We see this trend slowly shifting as more and more clients look for innovative solutions to meet their capital raising needs in order to fund their growth strategy.”
In the past, Saudi companies were able to borrow very cheaply from local banks, which held vast deposits from oil sales. The fall in the price of oil has squeezed domestic liquidity, forcing companies to look internationally.
Jabr said Deutsche Bank views Saudi Arabia as a core growth market with huge potential for global investment banks.
There is plenty of other prestigious work for banks in Saudi Arabia – pitching is taking place this week for arranger roles on the country’s long-anticipated sovereign bond, which is expected to run close to Argentina’s $16.5 billion record for largest emerging market issuance.
“You need to show up … get all your big guns out because it’s such a big opportunity,” said a fourth banking source, who also did not want to be named. “These deals don’t happen twice.”