Photographer: Waseem Obaidi/Bloomberg

Citigroup Says Saudi Is Best Emerging Market for Deals

  • Middle East M&A deal pipeline is strong with fees increasing
  • Downstream oil, gas, petrochemicals among most active sectors

Saudi Arabia’s planned privatizations, including a share sale in the world’s biggest oil company, represent the biggest investment banking opportunity in emerging markets, according to Citigroup Inc.

Implementation of the kingdom’s plans to restructure the economy -- known as Vision 2030 -- "could translate into a fantastic wallet for the investment banks," Omar Iqtidar, Citigroup’s head of investment banking in the Middle East, said in an interview in Dubai. "We are seeing momentum picking up, with skeptics increasingly converted into believers of the restructuring," he said.

Deputy Crown Prince Mohammed bin Salman is overseeing an unprecedented shakeup of the biggest Arab economy as the country seeks to reduce its reliance on oil after a plunge in prices that started in 2014. The country plans an initial public offering of Saudi Arabian Oil Co., which the prince said may value the company at more than $2 trillion.

The Aramco share sale is part of the prince’s strategy to create a sovereign wealth fund that will eventually control more than $2 trillion and boost income from investments. The country is also seeking to potentially breakup its state-owned utility Saudi Electricity Co. into four independent power generating companies.

Saudi Role

Global investment banks are jostling for roles advising the government on everything from sovereign loans to IPOs. JPMorgan Chase & Co. and Michael Klein, the former Citigroup investment banker who runs his own boutique, have been selected to advise on state-owned Saudi Aramco’s IPO, people familiar with the matter said in April. Saudi Arabia’s stock exchange, the biggest in the Middle East and Africa, has hired HSBC Saudi Arabia Ltd. as a financial adviser for its initial public offering, scheduled for 2018.

Citigroup last year won approval to trade Saudi Arabian equities, its first banking license since exiting the country in 2004, people with knowledge of the matter said in September. The bank is directly investing in companies listed on the Saudi Stock Exchange after the stock market opened to direct foreign investment last June.

The New York-based bank sold its 20 percent stake in the Saudi American Bank, now known as Samba Financial Group, to the state Public Investment Fund for $760 million in 2004, ending a business that it helped form in 1955. It has still won a role advising on some of the largest deals from the country, including Saudi Basic Industries Corp.’s acquisition of General Electric Co.’s plastics unit for $11.6 billion in 2007. It was also part of Saudi Aramco’s $10 billion loan in 2015.

Crude Plunge

Crude’s more than 50 percent plunge since the middle of 2014 is pushing governments across the region to dip into past savings, boost borrowings and cut spending, which is slowing economic growth. That has helped make regional assets cheaper, with Saudi Arabia’s benchmark index down 33 percent from a year ago and Dubai’s by 15 percent.

Mergers and acquisitions in the Middle East and Africa have declined 43 percent this year to $17.8 billion, according to data compiled by Bloomberg. Citigroup is the region’s third-biggest adviser for M&A transactions this year, according to the data.

"Regional mergers and acquisitions may not appear very active in terms of announced deals, but the pipeline is very strong and there are a lot of deals happening," Iqtidar said, adding the bank is also seeing significant improvement in fees. "Saudi, Kuwait, and Egypt are offering the most exciting opportunities across sectors but the notable ones are in downstream oil and gas and petrochemicals, with healthcare and consumer products in the private sector space," he said.

Several large family-owned businesses in the six-nation Gulf Cooperation, which includes Saudi Arabia and the U.A.E., are attempting to sell assets that they own outside the region as the sentiment in the Gulf is "cautious" given oil’s decline, Iqtidar said. They "are now ready to take some money off the table at reasonable valuations and diversify into other markets," he said.

Initial public offerings will also return to the region after a long hiatus, Iqtidar said. "It’s all about sentiment and confidence so a question of finding the right window, which should turn as global sentiment improves," he said.

(Deletes reference to role in a potential Sabic unit deal in 9th paragraph.)
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