Saudi King Shelved Aramco IPO To Teach Son, Prince Bin Salman A Lesson

Less than a year after Saudi Arabia’s unprecedented monetary shakedown of wealthy princes and other Saudi oligarchs in November 2017, which among others ensnared Prince Alwaleed bin Talal who was an involuntary “guest” at the Riyadh Ritz-Carlton for months – until he emerged a free man after an undisclosed settlement – and also eliminated potential threats to the ruling family including close family members, Reuters is out with a fascinating report according to which new splinters may be appearing inside Saudi society, in this case involving a schism between the Saudi King Salman, and his 32 year old son and de facto ruler, Crown Prince Mohammed bin Salman.

As was first reported in early 2016, for the past two years Saudi Arabia had been preparing to place up to 5% of its national oil company, Saudi Aramco, on the stock market. Officials talked up the Aramco initial public offering with international exchanges, global banks and President Donald Trump.

The planned listing was supposed to be the cornerstone of the kingdom’s promised economic overhaul and, at a targeted $100 billion, the biggest IPO ever. More importantly, it was the brainchild of 32-year-old Crown Prince Mohammed bin Salman, heir apparent of the world’s largest oil exporter and the effective head of OPEC.

However, after months of setbacks, the deal came to a crashing halt after the international and domestic legs of the IPO were pulled earlier this month.

The reason, according to Reuters: King Salman – the prince’s father – stepped in to shelve it.

The decision came after the king met with family members, bankers, and senior oil executives, including a former Aramco CEO, said one of the sources, who requested anonymity. Those consultations took place during Ramadan, which ended in the middle of June.

Having been seemingly asleep for the prior two years, The king’s interlocutors told him that the IPO, far from helping the kingdom, would undermine it. Their main concern was that an IPO would bring full public disclosure of Aramco’s financial details, something we knew from prior reports on why the IPO was problematic.

Then, in late June, the king sent a message to his administrative office, demanding that the IPO be called off: the king’s decision is final, a Reuters source said.

“Whenever he says ‘no’, there is no budging,” the source said, although it wasn’t clear just what the King was so afraid would be discovered as part of the IPO due diligence.

Unwilling to telegraph the confusion, if not chaos, between the two top Saudis, Energy Minister Khalid al-Falih said the government was still committed to conducting the IPO at an unspecified date in the future. A senior Saudi official referred Reuters to that statement and repeated that the government, Aramco’s shareholder, was working towards an IPO when conditions were right.

“We are surprised that despite this statement, that the Government continues actively to plan for the IPO, Reuters persists in asking questions alleging that plans are halted.”

“Aramco’s shareholder is the Government of Saudi Arabia. His majesty, King Salman, has delegated management of the IPO to His Royal Highness the Crown Prince, and a Committee which includes the Ministers for Energy, Finance and Economy. Therefore, decisions around the nature and timing of the IPO, will be decided by the Committee for the Government’s approval,” the official said.

Logistics aside, the unspoken message here is the implicit criticism by the King of his son’s decision: the shelving of the Aramco IPO is a major blow to the prince’s Vision 2030 reform programme, which aims to fundamentally transform Saudi Arabia’s oil-dependent, state-driven economy.

And the punchline: the king’s unilateral decision to pull the Aramco IPO suggests the king is keeping the new unilateral power of the young prince – accrued soon after his father’s accession to the throne in January 2015 – in check, i.e. teaching him a lesson who is in charge.

To be sure, King Salman initially delegated enough power to his son that to many international community, MBS was the effective rulers of Saudi Arabia:

While King Salman has the final say on policy, he has given great authority to his son, who is known as MbS. After assuming powers as defence minister and chief of the royal court in January 2015, MbS launched a war in Yemen, adopted a more assertive stance towards arch-rival Iran, and implemented a diplomatic and trade boycott of Qatar.

Taking the reins of a powerful new economic council, he set out to tighten state spending, grow the private sector and win foreign investment.

The king also allowed him to push through high-profile social reforms including ending a ban on women driving and opening cinemas in the deeply conservative Muslim country.

MbS entered the line of succession in April 2015, replacing an uncle as deputy crown prince. Two years later, he was elevated to crown prince in a palace coup that removed his cousin Prince Mohammed bin Nayef, the interior minister.

That said, MBS has made prior mistakes, most notably vis-a-vis Saudi entanglement with the Trump administration. When the young prince gave the impression last year that Riyadh endorsed the Trump administration’s still nebulous Middle East peace plan, including U.S. recognition of Jerusalem as Israel’s capital, the king made a public correction.

At the Arab League summit in April, he reaffirmed Riyadh’s commitment to the Arab and Muslim identity of Jerusalem following an uproar in the Islamic world. “The king is obsessed with the idea of how history will judge him. Will he be the king who sold Aramco, who sold Palestine?” the second source said

Meanwhile, Saudi interest in the Aramco IPO started to wane, and by April, Aramco stopped paying some of the banks working on the deal their retainer fee, Reuters reports.

Then, while the king was deliberating, in mid-June, the banks, including JP Morgan and Morgan Stanley, were invited to pitch for something different. As we reported last month, banks were were instead asked to present proposals for Aramco’s acquisition of a stake in petrochemicals giant SABIC from the sovereign wealth fund PIF.

That was an initial sign that plans for the listing were stalling and that Riyadh was looking to raise funds elsewhere, the banking sources said.

The King’s shelving of the Aramco IPO has various consequences, not the least of which is that a major source of new capital is now gone. And while Saudi Arabia can still generate cash from other sources and move ahead with reforms, MbS had promised the listing would help create a “culture of openness in the secretive kingdom.”

Not anymore.

In addition to raising concerns about that commitment to transparency, the shelved IPO added to the sense of unpredictability after scores of top royals, ministers and businessmen were rounded up in an anti-corruption campaign last November.

But the biggest question is whether the Aramco IPO fiasco is an indication of a fallout between the Alzheimerish King and the man most had – until now – considered the true Saudi leader.

According to Reuters source, the answer is, at least for now, no: the sources said that even though the king’s decision was a blow to the prince’s agenda, he is still the favorite son and heir with a major influence on policy. Rather, they say, it suggests the king wants to show that he will be the deciding voice for the foreseeable future.

“I’m not sure that I would see it as an undermining of the rule of the crown prince. It’s much more likely ensuring that he doesn’t go off the deep end,” said James Dorsey, a senior fellow at Singapore’s S. Rajaratnam School of International Studies.

Of course, as last November’s events showed, when it comes to family ties in Saudi Arabia, which along with its oil deposits is legendary for its extended, constantly shifting intra-family feuds, the King’s affectation with MbS could turn on a dime following another flawed decision.

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Author: Tyler Durden