admin May 21, 2019

This story has been amended to revise the attribution for one of the sources.


Saudi Crown Prince Mohammed bin Salman is three years into his “Vision 2030” socio-Economic reform plan aimed at reducing the economy’s reliance on oil by increasing the contribution of the private sector and developing new industries.

Saudi Arabia’s largest share offering in four years has been postponed for two days amid rising geopolitical tensions and a looming trade war between the U.S. and China which have rattled global markets.

The flotation of Arabian Centres is a key test of international investor sentiment in the Kingdom since the death of dissident journalist Jamal Kashoggi last year and values the country’s largest shopping mall developer at around 12.6 billion riyals ($3.3 billion). It will be the biggest initial public offering since the $6 billion listing of lender National Commercial Bank four years ago.

Arabian Centres, which is majority owned by Saudi’s Fawaz AlHokair conglomerate, did not give any reason for delaying the initial public offering but said shares would start trading on Wednesday. It expects to raise 2.6 billion riyals, having been priced on May 8 at the bottom of the range of 26 to 33 riyals per share.

The initial public offering is the first time shares can be directly sold to U.S. qualified institutional investors in the U.S. under a new securities rule introduced in 2017.

Pulling it off will be no small feat. The deal has been several years in the making and has involved hundreds of meetings with regulators and advisers and a whirlwind ten-day investor roadshow.

“The geopolitics in the region, at times, have been difficult, drawing attention away from the capital-raising and investing opportunity that is building up here,” said Sammy Kayello, chair and chief executive for Middle East and North Africa of Morgan Stanley, which is co-advising on the IPO.

International banks and investors were given another reminder of the geopolitical challenges in Saudi markets last week after the sabotage of two oil tankers sent the Tadawul, the local stock market, plummeting. The Tadawul is down 10% since May 1.

The killing of dissident journalist Jamal Khashoggi in the Saudi consulate in Istanbul seven months ago has strained relations between Western allies and Mohammad Bin Salman, the Kingdom’s 33-year old crown prince, who is known as MBS.

MBS has come under international scrutiny after hundreds of prominent Saudi businessmen were detained at Riyadh’s Ritz Carlton in late 2017 as part of the government’s so-called anti-corruption crackdown. The billionaire co-founder of Fawaz Alhokair Group was among those detained. He and his two brothers will each own 8% of Arabian Centres after the listing.

A person close to the Fawaz Alhokair Group board said: “The Alhokair Family was not charged with anything, they were never indicted and they never paid any settlement money to the government.”

The crown prince has painted himself as a reformer and is three years into his “Vision 2030” socio-Economic reform plan aimed at reducing the economy’s reliance on oil by increasing the contribution of the private sector and developing new industries.

Arabian Centres’ management has had to persuade investors that the company’s corporate governance complies with international standards. This includes barring the sons of the founders of the Fawaz Alhokair Group from taking up senior management positions without board approval.

It has also brought in international firepower, hiring a new CEO, Olivier Nougarou, the former head of European property group Unibail-Rodamco’s German division, in April. A person close to the Fawaz Alhokair Group board noted that the company has recently added executives from Europe, the U.S. and Dubai as well as two independent Saudi directors to the board.

Arabian Centres enlisted blue-chip Wall Street banks to help with the IPO process, appointing Morgan Stanley

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 and Goldman Sachs

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 as financial advisers, with Credit Suisse

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 and Citigroup

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  as bookrunners, alongside a host of local banks.

Morgan Stanley worked for months with the Saudi government to accelerate the pace of financial and regulatory reform. The bank has also worked with the Tadawul, the Capital Markets Authority and the Ministry of Finance’s Debt Management Office, to try to ensure Saudi’s markets could cope with the inflow of foreign money.

Their efforts were tested in April, when orders for the country’s first debt offering from the state-controlled oil company Saudi Aramco topped $100 billion.

“Investor demand was strong for the offering, and global in reach. It’s a great advertisement for what can be achieved in the Kingdom,” said Kayello, who worked on the bond alongside a team from JP Morgan

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For the Arabian Centres IPO, it was important to get support from local funds before international institutions would invest, according to a person close to the deal.

“International investors wanted reassurance that local investors would buy into the IPO before they committed to it. They [the international funds] were asking can you do business with people who have been in and out of the Ritz?” the person said. “Let’s just say there were some very senior calls made by the government asking local investors to pay attention to the offering,” the person added.

After a hectic 10-day book-building process, which involved 106 meetings with investors spanning the Middle East, London and New York, the books for the IPO were covered. Non-Saudi investors accounted for 16.7%.

Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, invested through separate institutional investors so that it would not own a direct stake in Arabian Centres, according to people close to the situation.

Those people said U.S. fund Blackstone

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the world’s largest manager of alternative assets, had also invested. Foreign ownership in Saudi public companies is at an all-time high of around 6%, up from 4.7% recorded at the end of 2018. In the year to date, total active net foreign buying stands at $5.5 billion.

Saudi Arabia’s equity markets are expected to get a boost this year when the country is added to MSCI’s Emerging Market Index, which is tracked by around $14 trillion in investor assets. Analysts estimate around $15 billion could flow into the capital markets once Saudi is included in the benchmark.

“The MSCI inclusion is a real shot in the arm for Saudi, even if you’re a passive investor. The country will account for around 2.4% of the index, which is bigger than any other Arab country,” Kayello said.

To win the index compiler’s stamp of approval, Saudi had to meet several criteria related to, for instance, the sustainability of economic development and the openness to foreign ownership.

Sebastian Lieblich, MSCI’s global head of equity solutions, said the proposal for inclusion received the support of the vast majority of international institutional investors that participated in the consultation.

“International investors were impressed by the speed of change in the accessibility of the Saudi Arabian equity market and the level of commitment that the Capital Market Authority and the Saudi Stock Exchange have demonstrated,” he added.

Investment banks are betting that Saudi’s market will eventually open up. The advisers to Arabian Centres have invested years of work for not much in the way of fees. According to the IPO documents the total costs of the deal, including marketing, have come to just 180 million Saudi Riyals, or just under $50 million. Typically banks in Europe, the Middle East and Africa charge an average 3% of the proceeds of IPOs raised.

“Apart from asset gathering, Saudi never offered much of a revenue stream. That has now changed, but it will be a long, long game,” one senior banker at a large U.S. firm operating in the region said.

The bulk of the proceeds from the Arabian Centres IPO will be used to pay down debt with the rest used for expansion as the company looks to tap into the rapidly shifting demographics in the country, where around 52% of the 33 million population is under 30 years old.

The company plans to increase the number of malls from 19 to 27 within the next four years and fill them with more restaurants and cinemas.

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