Complex Made Simple

Saudi Aramco chooses who to pay millions to for advice on upcoming IPO

We’re only a few weeks away from a meeting that will have top Saudi Aramco and Public Investment Fund (PIF) officials inviting some of the financial institutions’ head honchos to discuss how each plans to contribute, with both advisory and money, to the company’s IPO.

Aramco shares owner PIF aims to raise $100bn, from the sale of 5% of Aramco’s $2trn potential valuation.

Reuters just exclusively reported that Aramco has not invited UBS and Bank of America Merrill Lynch (BofAML), among the world’s biggest, to pitch for senior advisory roles because they have no record of lending Aramco in recent years, while chosen others have, according to five finance sources.

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“They have been frozen out by Aramco,” sources told Reuters, adding “despite having operations in the Middle East and wanting to take part in the IPO, which could be the biggest in history.”

“The sources said the exclusion of the banks reflected a corporate culture in the region of tying advisory mandates to how much of its own money a lender is willing to commit.”

Barclays has also not been invited to pitch for reasons not yet clear but all 3 banks could still be awarded more junior advisory or bookrunner roles.

Who’s in?

Reuters indicated Aramco will need large cash amounts from Western banks in the coming period to keep up with its investment pledges.

“Among its plans, it aims to invest $300bn in oil and gas production in the next decade and expand its refining and petrochemical capacity around the world,” said Reuters.

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Bankers see such advisory roles in the IPO as a passageway towards cherry picking deals anticipated to emanate from the kingdom’s Vision 2030 and related diversification strategy away from oil.

Reuters reported sources as telling it last week that Aramco has invited banks including Citi, Goldman Sachs and Deutsche Bank “to pitch for global coordinator mandates at the end of January or beginning of February in the city of Dhahran,” Aramco’s HQ.

“JP Morgan which has already been appointed as an adviser for the listing, generated the biggest fees from Aramco for loans, at $9.5 million over a 15-year period,” said Reuters.

Citi, and already mandated HSBC were 3rd and 6th biggest loan fee recipients with $8.1 million and $5.6m respectively, according to Reuters.

“Deutsche Bank is in the top 20, while Goldman is lower down at 34, but bought a slice of Aramco’s $10bn credit facility on the secondary market last year.”

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Money shelled is money earned

Reuters said that advising and executing banks of Aramco’s stock market listing are expected to share 1/5 of the IPO amount or about $200 million, quoting banking sources and industry insiders.

“The 35 banks who worked on Alibaba’s $21.8bn float, led by six main underwriters, pocketed an estimated $300m among them,” according to Thomson Reuters data.

“Those jostling for a role in Aramco’s listing are doing it for the status and league table ranking, while some – such as JP Morgan and HSBC – have been informally working on this since at least 2016.”

Thomson Reuters data shows Aramco, which produces 10.5 million barrels of crude oil per day, has paid out $180 million to advisers globally since 2002.

“By comparison the biggest corporate fee payer of last year, Japan Post Holdings Co Ltd   paid $382 million for investment banking advice, including on its IPO, in 2017 alone,” said Reuters.