Banks scramble for a piece of Saudi Aramco IPO

The world’s biggest investment banks are pulling out the stops to win part of the listing of Saudi Arabia’s national oil company, but industry insiders admit the financial rewards will be far lower than Saudi Aramco’s potential valuation suggests.

Analysts value the entire company as high as $10tn, so it is easy to see why the deal has whetted the appetite of investment banks that saw their industry’s fees fall 8 per cent last year despite the mergers and acquisitions boom.

“Everyone is jumping up and down. There are probably hundreds of emails going around,” says a European investment banker, describing the days after investment banks were caught off-guard by the Saudi royal family’s statement that Saudi Aramco may be listed.

But the actual deal is likely to be smaller and the fees more modest than that headline number would suggest.

“It’s a franchise deal,” says a second investment banker with long experience in the region, referring to the kind of transaction that would enhance a bank’s reputation, but not its bottom line. “Every bank in the world is going to want to have a role in this.”

He says it is inconceivable the Saudis will include Saudi Aramco’s national resources in the deal, since they are of critical importance to the state.

That leaves a company valued at about $500bn, he believes. The Saudis might also chose to float only the company’s international arm, which would bring the deal size closer to $100bn.

The $100bn to $500bn range for a listing is still massive — it could top the $170bn valuation of Alibaba’s record-breaking initial public offering in September 2014. But it is a far cry from $10tn.

Whatever the deal size, banks expect their fee to be low on a percentage basis, both because of the prestige of the deal and the dynamics of selling on behalf of the state.

“We’d certainly offer them a special price,” the second banker says, pointing to the 0.01 per cent fee banks earned on the 2014 listing of Saudi’s National Commercial Bank as a reasonable yardstick.

Fees for private sector IPOs are closer to 1 per cent of deal size.

Some banks are already pounding the pavements in Saudi Arabia, but since no official process has begun, there is a limited amount they can do to sway things in their favour. While Aramco itself has used public tenders to select its advisers in the past, the Saudi Supreme Council could make an appointment unilaterally.

“Saudi Arabia is not a place where every bank is active, so [winning the deal] will come down to a combination of who has relationships and who has a presence locally,” says the European investment banker.

HSBC has the biggest market share in the Middle East and Africa with 6.6 per cent of investment banking fees in 2015, according to Thomson Reuters’ global investment banking review. Citi is next, at 6 per cent, followed by Barclays’ 4.9 per cent, Bank of America Merrill Lynch’s 3.4 per cent and Deutsche Bank’s 3.3 per cent.

Banks with previous experience on deals with Saudi Aramco include Deutsche Bank, which last year helped the group with its €1.2bn move to form a joint venture focused on synthetic rubber production with a German chemicals company. Citi, meanwhile, has worked on a string of projects for Saudi Aramco including strategic financing. A total of 27 banks signed credit facility agreements in a deal in March last year.

Other banks may try to leverage their familiarity working on equity deals in the region. HSBC acted as financial advisers on the $6bn initial public offering of National Commercial Bank. Elsewhere, Morgan Stanley and BofA are running the planned listing of Arabian Centres mall, a unit of Saudi Arabia’s Fawaz Alhokair group, which is aiming to raise as much as $2bn from an IPO this year.

The first bank appointed could be paired with consultants McKinsey, who are already working with Saudi Aramco on strategy. Other banks could have to wait a long time to get their seat on the deal. Some bankers say it might not actually happen until 2017, despite last week’s statement by the Saudi royal family.

“In normal circumstance you would never make that sort of statement in a normal capital market unless you were pre-marketing,” says one adviser. “But I don’t think it’s necessarily the case that they have taken any material steps towards preparing for an IPO.”