Some of the world's top investment bankers gathered at a Riyadh palace on Saturday to deliver their final recommendations on a project that had consumed the government of Saudi Arabia for the past few years: the initial public offering of Saudi Aramco.
The financiers were there to meet Yasir al-Rumayyan, the state oil company's chairman and the head of the country's sovereign wealth fund, along with cabinet ministers and the company's leadership.
Their message would disappoint the hosts: international investors were unwilling to buy shares in Saudi Aramco anywhere near the US$2 trillion ($3.1t) valuation long sought by the kingdom's powerful Crown Prince Mohammed bin Salman. No amount of sweeteners — from promises of higher dividends to bonus shares for local retail investors — had managed to change that reality.
At the heart of Prince Mohammed's economic reforms, the IPO was at one time seen as a mechanism to raise US$100 billion from a 5 per cent share sale and help open up the Saudi economy to foreign investors. Not only was the size of the listing scaled back, so was its scope, along with any plans to list on international exchanges.
Dogged by repeated delays since Prince Mohammed first disclosed his intentions to list shares in Saudi Aramco nearly four years ago, the heir apparent in September put Rumayyan in charge of the IPO process while ousting the kingdom's powerful oil minister who was seen as an obstacle to the listing.
The kingdom's highest authorities then pushed to get the flotation over the line as early as December on Riyadh's Tadawul exchange.
The bankers who assembled in the Saudi capital presented the group with what they thought was a moderate proposal to get a deal done and help keep Prince Mohammed's credibility intact while ensuring his ambitious economic reforms stayed on track.
Only a handful of bankers there from the nine global IPO co-ordinators were selected to deliver their recommendations: Bank of America's Soofian Zuberi, Citigroup's Tyler Dickson and Morgan Stanley's Henrik Gobel. Others, such as Mike Daffey from Goldman Sachs, were left to loiter in an anteroom. The banks declined to comment.
"There were basically two options — an international deal valued at US$1.5t, which could possibly have been walked up to US$1.6t, or a local version coming in at US$1.7t," said one person briefed on the meeting.
The bankers' nerves were already strained after they were left waiting for five hours, occupying the time by munching on sandwiches and sipping juice with their rivals.
The meeting with Saudi officials lasted just 10 minutes.
The bankers were left to head off to their respective homes, from Riyadh to Europe, without knowing what the country's highest authorities had decided.
Despite years of jumping through hurdles to win business from Prince Mohammed, the sovereign Public Investment Fund and Saudi Aramco, advisers only found out the decision on Sunday morning.
It was then that Saudi Aramco announced its 1.5 per cent sale at a price that would value its shares at US$1.6t-US$1.7t and raise only as much as US$25.6b.
Plans to market the shares directly in the US, Europe and Asia were also scrapped. The IPO would be focused on Saudi and Gulf investors.
"Rumayyan must have thought: 'Why do we want to hand over our crown jewel to these internationals [for a lower valuation] when we could sell it to our own people,'" the person said.
But it was known that ultimately "all the decisions come from MBS" — a reference to the crown prince.
Some foreign institutions can still invest, but through limited channels. Given the constrained distribution, some advisers working for the dozens of banks on the deal now question their purpose. Collective banking fees from the IPO, which have yet to be disclosed, are also likely to be much lower than anticipated.
Alarm over the weaker valuation projections coming from potential investors had been raised weeks ahead of Saturday's pivotal meeting in Riyadh.
At an earlier valuation meeting with Rumayyan several weeks before, bankers had relayed the consensus of US$1.1t-US$1.5t garnered from initial investor meetings across the US, Asia and Europe.
"Rumayyan didn't hear anything after he heard US$1.1t," said the person. "He went mad."
His irritation stemmed from the rosy valuations of US$2t or more forecast by the banks when they were pitching for the mandate earlier in the year, only for them to later lower these figures after feedback from potential shareholders.
A dividend yield lower than other traded energy groups, governance issues, concerns about the security of energy infrastructure after attacks on key facilities in September, as well as broader state interference in corporate strategy, were among the issues holding back fund managers.
A similar message was conveyed just last week. There was a big gap in demand between domestic retail investors and foreign institutions, according to two people familiar with the process.
By this time, one global co-ordinator, deciding to adopt a more "realistic" approach, had downgraded its valuation to US$1.1t-US$1.2t. "They got annihilated [by Rumayyan]," the person said.
Having opted for a local-first option, Saudi Aramco and its advisers cancelled global roadshows designed to win over top global fund managers.
Instead, they will market primarily to retail shareholders in the kingdom, Saudi funds and regional investors at upcoming meetings around the Gulf, except for Qatar, which has been embargoed for more than two years by a quartet led by Saudi Arabia.
The listing will heavily rely on interest from local investors, some of whom had been caught up in Prince Mohammed's anti-corruption drive in 2019 and are being leaned on to invest in the deal.
There has also been a patriotic surge of interest in the deal across the nation and around the region, where there are fewer concerns over security and governance. Domestic banks are pledging to lend generously to investors looking to snap up shares.
Saudi Aramco has also approached state investors, including sovereign funds in Abu Dhabi and Kuwait, as well as other government-related firms in Russia, China and Malaysia that could still create additional demand so the issuance can beat the record US$25b raised by China's Alibaba back in 2014.
"I think they will be oversubscribed 2-3 times," said one regional investor, who is placing up to US$5 million in the IPO. Yet this was still not enough to meet the once lofty ambitions of Saudi authorities.
Saudi Aramco said "the IPO remains open to international investors outside the United States".
With international banks now viewing the listing less favourably, advisers are now turning on each other. One accused a rival of having "whored themselves on the price range" while others spread stories of peers being castigated by Saudi officials.
Another banker said: "There is real tension in the syndicate. These deals take on a dynamic and everyone turns on each other."
Seeing the prospect of years of work disappearing over the horizon, they are increasingly philosophical about the deal's degeneration into, what one banker called, a "Greek tragedy".
"Advisers advise, decision makers decide. It's up to them to heed the advice or ignore it," said another person briefed on the process. "Simple."
Written by: Simeon Kerr, Arash Massoudi and Anjli Raval
© Financial Times