BY ROB COX

Amazon and Aramco would seem to have little in common apart from their shared first letter. The Saudi giant sucks oil from Arabian sands and sells it to energy-thirsty nations, sending the proceeds back to its controlling monarchy. Amazon sells stuff online, ships it to customers rapidly and reinvests the profits to destroy the economics of every industry it enters.

But both corporate titans are engaged in a similar game of extraction, quite separate from their business models. In Saudi Aramco’s case, the world’s financial capitals are prostituting themselves to accommodate an initial public offering potentially valuing the company at $2 trillion sometime over the next year. Similarly, Amazon’s request for proposals for a second headquarters in North America has U.S. municipalities bending over backwards to please the $765 billion behemoth.

Competition is a good thing. The fact that, say, Newark is trying to sell its charms to Amazon boss Jeff Bezos over Miami’s is a healthy exercise for New Jersey’s largest city. Even if Newark loses, the process should make the city better prepared to attract other businesses and nurture the ones it already has. Saudi’s exchange-shopping could produce similar re-examinations of the strengths and weaknesses of the financial centers and their bourses in London, New York, Hong Kong and beyond.

But there’s also another risk from what might be called the “Aramazon effect”: a shortsighted race to the bottom that sticks the winners with long-term curses their leaders, communities and institutions may live to regret.

Take the wooing of Aramco, which went into high gear two weeks ago in the UK. Prime Minister Theresa May rolled out the red carpet for Crown Prince Mohammed bin Salman, the heir to the throne and the architect of Riyadh’s ambitious “Vision 2030” economic-reform program, for which the listing of Aramco is a key component. Foreign Secretary Boris Johnson welcomed bin Salman, who also had lunch with Queen Elizabeth and later dined at Clarence House with Princes Charles and his son William – rare treatment for a 32-year old dauphin.

There are, of course, many reasons for Britain to suck up to the son of the reigning Saudi monarch, including defense, geopolitics and general business considerations. BAE Systems, for instance, bagged an order for 48 Typhoon jets from the Saudi air force following the visit. But landing the Aramco listing is critical to helping the May government contend that divorce from the European Union will not weaken the UK’s pre-eminence as a global financial capital. That’s especially true after $158 billion consumer-goods giant Unilever, picked Rotterdam over London as its global headquarters on Thursday.

Investors in particular have protested considerations by the London Stock Exchange and regulators to water down listing, governance or disclosure requirements to assuage the Saudis. The Investment Association, which represents fund managers overseeing nearly $10 trillion of client money, has lobbied the Financial Conduct Authority not to move forward with the creation of a so-called “premium listing” category for companies controlled by sovereigns, as Aramco would be.

The worry is that by modifying the rules around related-party transactions and controlling shareholders, London’s reputation for the highest standards of corporate governance will be diluted. Recent history offers the opposition some evidence. They point to the ignominious delisting of Eurasian Natural Resources Corporation five years ago. The Kazakh mining group incinerated shareholders after its London debut amid allegations of malfeasance and a criminal investigation by the Serious Fraud Office. So did Bumi, a miner controlled by an Indonesian family, which was eventually delisted after fierce infighting among its shareholders. Both were included in FTSE indices, which the special class listing proposed for Aramco would not be.

Beyond bending rules, which the Hong Kong exchange has done as part of its ambition to best London and New York for the Aramco deal, cozying up to Saudi Arabia raises bigger questions about morality. Reformer though he may be, bin Salman’s recent roundup and detention of hundreds of Saudis has attracted widespread concern about human rights, due process and the rule of law. The New York Times reported this week on the possible beating, and subsequent death, of one detainee. While it’s perhaps just business for the exchanges to ignore these allegations, it’s uncomfortable for leaders like May and President Donald Trump – who will welcome bin Salman and his entourage on March 20 – to engage in such public bootlicking.

Amazon doesn’t kidnap people and beat them in the Riyadh Ritz-Carlton. But the contest to host its second headquarters has unleashed a similar fox-in-the-henhouse tizzy. The danger is that the winner of the competition, whom Amazon promises will see 50,000 new jobs and some $5 billion of capital investment, winds up fiscally constrained by piling incentives, tax breaks and other concessions that, in the end, produce no greater financial benefit. It has already provoked other companies to ask municipalities to match the sorts of goodies offered to Amazon.

That’s one of the reasons Richard Florida, an urban studies expert and professor at the University of Toronto, launched a “Non-Aggression Pact for Amazon’s HQ2” last month. The petition, which has been signed by leading economists, policymakers and urban planners, argues that tax giveaways and location incentives are wasteful and counterproductive. Worse still, they sap communities of funds that could be used for education, housing and transportation.

Moreover, Florida worries that Amazon is sowing the seeds for an even bigger backlash than the one U.S. tech giants are already weathering due to their dominance. What happens if the promises of prosperity don’t come true? “There will be demonstrations and protests and accusations that ‘you bankrupted our town,’” he says. “How can mayors and the heads of chambers of commerce explain to the man on the street that they are giving billions of dollars to the richest man in the world? It just doesn’t sound right.”

The risk is one that Amazon seems prepared to tolerate in asking cities to fight it out, arguably for the benefit of its shareholders today. And, who knows, landing its new HQ might actually improve the fortunes of a downtrodden city like Richard Florida’s own hometown of Newark, offsetting any expensive incentives. But whether beckoning in a tech giant or the listing of a Saudi oil producer, local and national governments ought to better consider the risks of long-term failure before handing over the keys.

First published March 15, 2018

(Image: REUTERS/Maxim Shemetov)

BY ROB COX

Is global finance complicit with Saudi Arabian tyranny? Following the alleged assassination of a journalist critical of the kingdom, that’s the question leaders of the world’s biggest banks and investment firms must ask themselves before they fuel up their jets and head to Crown Prince Mohammed bin Salman’s “Davos in the Desert” in just over a week. From a strictly moral perspective, if they believe a scintilla of what has been put forward by Turkish authorities, they should bow out as JPMorgan’s Jamie Dimon did Sunday night.

The top American, European and Japanese banks and investment firms do business with many governments and regimes their executives can’t be particularly proud of at dinner time with the family. They rationalize the work by saying if they don’t do it, someone else will; and, anyway, they’re in no position to judge the political systems of other nations. These are potentially defensible arguments that can be applied to many clients associated with China, Russia and other countries accused of human-rights abuses.

The Saudi case adds a complicated wrinkle to this calculus. First, the Saudis deny involvement in the disappearance of Jamal Khashoggi, who entered the kingdom’s consulate in Istanbul and didn’t come out, Reuters reported. Second, there is little guidance from above on how to proceed. President Donald Trump has expressed dismay over the alleged killing by Saudi agents. But Trump, who has branded the U.S. press as “enemies of the people,” also said he didn’t want the matter to affect a $110 billion sale of arms to Saudi.

The imposition of sanctions, like those applied by the United States and European Union to Russia after the annexation of Crimea, would make it an easier decision for executives like BlackRock’s Larry Fink, or the bosses of France’s two largest banks to skirt the second installment of the Future Investment Initiative next week in Riyadh. Though banks may still act for some Russian companies, their executives now mostly skip public events like the St. Petersburg International Economic Forum. They do not want to be accused of renting out the public reputation and dignity of the organizations they run to a regime that, in the Saudi case, allegedly sanctioned the high-profile murder of a subject. It has been over a week since Khashoggi’s appearance and the Saudis have failed to provide evidence to refute Turkish allegations he was captured, killed and dismembered.

Even before Khashoggi, there were reasons to consider passing on the crown prince’s sophomore showing, as my colleague George Hay argued last week. After wrapping up 2017’s event, the prince known by the initials MBS rounded up hundreds of subjects on corruption charges without due process in the same hotel where the conference took place. Saudi has also been engaged in foreign-policy actions that have stoked instability in the Middle East and beyond, like the blockade of Qatar. Arguably worst has been the ongoing prosecution of a proxy war in Yemen that has left three-quarters of Yemenis, or 22 million people, needing humanitarian assistance or protection, according to the United Nations.

Of course, accusations that China similarly commits human-rights violations hasn’t stopped banks from investing in the country. Last year’s death of a Nobel Peace Prize laureate in a hospital under heavy guard didn’t stop executives from Standard Chartered, Société Générale, Blackstone or Mizuho from attending the China Development Forum in March.

Then there’s the money. This year, Saudi Arabia generated $247 million in fees from selling securities, arranging loans and advising on deals, according to Refinitiv. And that’s without the mother of all deals taking place. The now-shelved stock offering of Saudi Aramco, the national oil company which MBS contends is worth $2 trillion, could produce $200 million alone.

The biggest recipients have been banks whose executives were scheduled to grace the stage at the crown prince’s fiesta. The agenda was scrubbed from its website last week. Dimon’s company leads the league tables, or the rankings Refinitiv compiles based on estimated fees, with $22 million this year and $81 million over the past six. Though HSBC trails JPMorgan in 2018, the London bank captained by John Flint has earned $110 million from the Saudis since 2013, more than its rivals.

Citigroup, Standard Chartered, Goldman Sachs, Mitsubishi UFJ, BNP  and Crédit Agricole fill out the peloton of top fee earners. Goldman executive Dina Powell was expected to show up. So were BNP Chairman Jean Lemierre and Frédéric Oudéa, chief executive of France’s second-largest bank, SocGen. StanChart boss Bill Winters was also expected in Riyadh.

There’s nothing wrong, in the legal sense, with any of the work these institutions have done for the Saudis. Until recently, it could have been argued there was nothing unseemly about it. At his debut last year, MBS presented a convincing image of a reformist from another generation willing to stand up to conservative clerics, let women drive and young people who make up two-thirds of the population go to movies and concerts.

While this hardly offset the beheadings in Deera Square and virtual absence of the rule of law, financiers, policymakers – even journalists like myself – saw hopeful signs of a more liberal and humanistic Saudi Arabia. The consensus was that while MBS has absolute powers, he understood the desire of his people for more freedom – and with clarity envisioned a future where the lifeblood of his nation’s economy, oil, would deplete.

If Khashoggi’s alleged killing was sanctioned by the Saudis, whether to clumsily silence a critic or brazenly transmit the crown prince’s resolve to erstwhile enemies, every bank that benefits from the rule of law at home should reconsider taking the stage next week. The presence of their senior executives may send a message that they – and their employees, directors and owners – endorse a regime potentially responsible for murdering a journalist.

Bankers may balk at sticking their necks above the parapet individually. But there’s a workaround. If all the banks and big investors due at this year’s event made a joint decision to withdraw, the scope for individual firms to be penalized by Riyadh in terms of future work would be limited. The heads of the relevant groups should be organizing some conference calls – and fast.

First published Oct. 14, 2018

(Image: REUTERS/Osman Orsal)

BY PETER THAL LARSEN

Saudi Arabia’s $69 billion asset reshuffle marks the end of a dry spell for investment bankers who have been courting the desert kingdom. Saudi Aramco on Wednesday announced its long-awaited purchase of a 70 percent stake in Saudi Basic Industries Corporation, or SABIC, from the country’s sovereign wealth fund. Though the rejig is mostly an internal affair, financing the deal may scatter some rewards in the direction of the international financiers who have spent years cosying up to the oil giant.

The deal that ranks as one of the largest M&A transactions so far this year is something of a consolation prize for investment bankers. They have spent years wooing Saudi Aramco and the country’s ruling royal family in the hope of landing a role on the oil giant’s initial public offering. But that was shelved last year.

That IPO was supposed to raise $100 billion to help Saudi Crown Prince Mohammed bin Salman realise his ambition to diversify the economy away from oil. The SABIC deal achieves a similar outcome in a roundabout manner. Aramco will pay 123.4 riyals per share in cash – slightly below the closing price on Wednesday – for the Public Investment Fund’s controlling stake in the company. The remaining 30 percent will remain publicly traded.

The oil giant’s financial resources are opaque, but it is expected to issue bonds to help finance the deal. Saudi’s energy minister said earlier this year it could raise about $10 billion. That and related financing will give banks including Goldman Sachs, JPMorgan, Morgan Stanley, Citi and HSBC an opportunity to reap some benefits from their efforts in the kingdom – even though fees on a bond issue are generally much slimmer than the rewards for arranging a massive equity offering. Beefing up Aramco’s downstream operations also enhances its appeal. The company says it plans to as much as double its global refining capacity to 10 million barrels per day by 2030.

The bond offering will test international appetite for Saudi investments, which understandably waned in the immediate wake of the brutal murder of journalist Jamal Khashoggi by Saudi agents in early October. Bank executives faced intense international scrutiny for their decision to keep working for the regime. The SABIC deal means it’s payback time.

First published March 27, 2019

(Image: REUTERS/Faisal Al Nasser)

BY JOHN FOLEY

Saudi Aramco is enormous – staggeringly so. Yet by one measure that matters a lot – the $2 trillion valuation envisaged by Crown Prince Mohammed bin Salman – it’s still not enormous enough.

The world’s largest oil producer disclosed the state of its finances for the first time on Monday as part of a bond issue to fund the $69 billion purchase of a stake in Saudi Basic Industries Corp (SABIC). Titillating details include Aramco’s towering $224 billion of EBITDA, and much new information about the way the company works with its sole shareholder, the government of Saudi Arabia.

It helps shed light on the question of what Aramco’s main crude-oil business is worth, adding flesh to the bones of a valuation Breakingviews laid out back in 2017 in an interactive calculator. At that time, the company was flirting with an initial public offering, which MbS said could value Aramco at $2 trillion. By Breakingviews’ estimates, using a discounted cash-flow valuation, that target was about twice what Aramco was actually worth.

Many of Aramco’s secrets are now in plain sight. Take its remarkable efficiency. The company finds and extracts crude oil for just $7.50 a barrel, where Breakingviews had assumed $9. The earlier analysis further assumed $2 a barrel of overheads, but the reality looks lower – perhaps $1.50. Breakingviews also assumed Aramco could jack up production to 12.5 million barrels a day, where it has instead stuck at around 10.3 million. Plug the new numbers into the 2017 model, and Aramco is still worth just $1.1 trillion.

But there’s another important variable: the oil price. Then it was around $50 a barrel, now it’s $70. If that level sticks, Aramco could be worth $1.7 trillion, the calculator shows. That’s closer to the prince’s target, and perhaps why he is now more relaxed about raising the curtain around the producer’s finances.

Even then, it’s a generous estimate. Around one-third of Aramco’s crude oil is sold not to third parties at prevailing prices but to Aramco’s “downstream” business, which must supply Saudis with energy at state-controlled prices, reducing its potential profit. The kingdom is moving towards paying the market price for its efforts, but for now, that’s a plan rather than a fact. And so, therefore, is the idea of Aramco attaining that prized $2 trillion valuation.

First published April 2, 2019

(Image: REUTERS/Ahmed Jadallah)