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The chairman of the world’s biggest oil company was about to lose his temper.

At a meeting in Riyadh on a sultry October evening, Achintya Mangla, one of JPMorgan Chase & Co.’s most senior bankers, had told Yasir Al-Rumayyan there was no way international investors were going to value Saudi Aramco -- just weeks away from an initial public offering -- at $2 trillion.

Bloomberg’s Yousef Gamal El Din reports on the trading debut of Saudi Aramco. Markets: European Open.” (Source: Bloomberg)

Al-Rumayyan, who’d risen in just a few years from head of a mid-sized investment bank in Riyadh to one of the most powerful jobs in the global economy, erupted. He unleashed a torrent of expletives in Arabic and English that shocked the roomful of battle-hardened bankers. The chairman was probably worried about telling his boss, the crown prince who locked up many of the nation’s wealthiest people in a five-star hotel just two years ago.

In the three and a half years since Saudi Arabia’s Mohammed bin Salman first proposed an initial public offering of Aramco, the state oil company that pumps 10% of the world’s oil, the $2 trillion valuation had caused trouble.

Yasir Al-Rumayyan, center left, and Sarah Al-Suhaimi, chairwoman of the Saudi Stock Exchange hold a photograph showing the 1933 oil concession agreement signing, during the Aramco IPO listing event in Riyadh, on Dec. 11.

The prince, who runs the day-to-day affairs of the kingdom, had long insisted on the stratospheric valuation, almost double any other business on the planet, and nobody had been able to convince him global investors didn’t agree. Anyone who argued with him got pushed aside, including Khalid Al-Falih, sacked as Aramco chairman and oil minister earlier this year.

This account is based on interviews with bankers, consultants, executives, government officials and members of the royal family, many of whom asked not to be identified discussing private meetings and conversations. Aramco, the banks and fund managers all declined to comment.

When bankers pitched for a role on the IPO this year, they told Al-Rumayyan what he needed to hear: that $2 trillion wasn’t out of the question. The range initially pitched by Wall Street was $1.7 trillion to $2.4 trillion, according to people involved in the process.

But as the sale came closer, the valuation was becoming unsustainable. In September and early October, Aramco’s bankers toured the world informally pitching the deal to fund managers from Boston to London to Tokyo. Everywhere, foreign investors told the company the valuation was too high. In Switzerland, where trillions are managed for the world’s richest people, fund manager Pictet & Cie. had an initial valuation as low as $800 billion.

The bankers took notes. A spreadsheet summarizing feedback, seen by Bloomberg News, is a who’s who of the global fund industry, from Capital Group, a large investor in natural resources, to BlackRock, the biggest fund manager. The consensus from foreign investors was around a valuation of around $1.2 trillion. A few signaled they could go a bit higher. “Up to $1.5 trillion based on dividend,” was the feedback from Franklin Templeton, the emerging markets specialist and among the most generous.

The problem for many investors was summarized in two words: dividend yield. At $2 trillion, Aramco would pay shareholders a dividend equivalent to a return of less than 4% on their money, well below what Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp. and other major oil companies pay.

Investors need a much higher yield, requiring a lower valuation. Wellington Asset Management, which controls $1 trillion in assets, told bankers the dividend yield needed to rise to 7% to 8% to make the company a worthwhile investment, implying a valuation of about $900 billion.

The job of JPMorgan’s Mangla that evening in October was to break the news to the client. Speaking on behalf of the band of banks hired for the deal, he burst the $2 trillion bubble, according to two people who attended the meeting.

Yasir Al-Rumayyan, right, and Aramco CEO Amin Nasser, thought the IPO would be fairly easy.

Mangla wasn’t the only one who tried to give Al-Rumayyan an unvarnished version of events. Jonathan Penkin, a senior equity capital markets banker at Goldman Sachs Group Inc., was told not to speak at any more meetings after he tried to talk about the valuation later in October, according to people familiar with the discussions. Motassim Al-Ma’Ashouq, the top Aramco executive in charge of the IPO preparations, and the person who had met foreign investors in preparatory talks, was also sidelined.

“Saudi Arabia has always had this problem: top-down decision making,” said Karen Young, a Middle East specialist at the American Enterprise Institute in Washington and a specialist in the political economy of the Middle East. “There’s a culture of fear. Savvy and able technocrats don’t feel comfortable speaking up.”​

Read: Aramco Soars in Debut to Hit Market Value of $1.88 Trillion

Saudi Arabia also drew a blank with strategic investors, which often agree to buy into an IPO earlier than others, becoming cornerstone shareholders on the deal. Aramco’s banks pitched from China to Singapore, Russia to Malaysia. Everywhere, they got a polite thanks, but no thanks.

Al-Rumayyan, 49, who had no experience of the oil and gas industry before becoming Aramco chairman, felt betrayed by the very same Wall Street bankers who had told him that securing a $2 trillion IPO was possible. Saudi Arabia had a tough choice -- go ahead, lose face and settle for a valuation below $1.5 trillion and attract foreign investors. Or delay the deal, perhaps forever.

Riyadh, keen to restore the kingdom’s standing after the murder of Jamal Khashoggi, opted for a third way: ignore foreign investors, and sell the Aramco shares at home. The government would pressure wealthy local families, many of whom had members locked up in Riyadh’s Ritz-Carlton in 2017, and bring in a few friends in the Middle East region, including funds controlled by the governments of the United Arab Emirates and Kuwait. Even then, it had to compromise on the valuation, settling for $1.7 trillion.

The new IPO is a shadow of the initial plan, but still allows the crown prince to claim victory. Last Thursday, Aramco announced it raised a record $25.6 billion, beating the $25 billion set by Chinese e-commerce giant Alibaba Group. The valuation means the world’s most valuable company, until now Apple Inc., will trade in Riyadh not in the U.S.

Corporate Titans The World's top-10 companies by market value Source: Bloomberg

For Wall Street, already stung by the collapse of WeWork’s IPO and Uber Technology Inc.’s chronic under-performance, Aramco is another embarrassment. After offering unrealistic valuations to win a place on the deal, the world’s most famous banks were unable to deliver, attracting scorn from their client and derision from investors. Now, many banks face the prospect of not getting paid for nearly four years of work.

The fact the IPO happened at all this year was a surprise.

The deal has been in the works since early 2016, when Prince Mohammed told The Economist newspaper he thought privatization would aid his Vision 2030 campaign to modernize the oil-dependent Saudi economy. But the sale, initially scheduled for 2018, was delayed several times as the Saudi leadership grappled with where to list it and how much it was worth.

Video: The story of Aramco’s IPO

By the start of this year, then Aramco chairman and oil minister, Al-Falih, believed the IPO was in the deep freeze and he hoped the deal would go away for good. But the crown prince and Al-Rumayyan, who headed the sovereign wealth fund that would get the proceeds, were still keen. He sought advice.

Throughout the stop-start IPO, one banker played a key role, although he rarely sought the limelight. The boutique operation of Michael Klein, a veteran Wall Street dealmaker who’d gone out on his own when he wasn’t made CEO of Citigroup Inc. during the financial crisis, advised Aramco directly, helping the company’s chairman to select the banks which would handle the IPO. Alongside Lazard Ltd. and Moelis & Co., Al-Rumayyan appointed his firm as an independent financial adviser.

If anyone could have warned Al-Rumayyan that Wall Street was inflating the Aramco valuation to win the IPO mandate, it was the ever-present Klein. He never did. According to several people, Klein thwarted attempts to have a discussion with the Saudi government about the valuation.

Another boutique bank, Evercore Inc., who worked on the IPO from 2016 to 2018, didn’t return. One of their top bankers, David Waring, warned the kingdom early in the process the $2 trillion was going to be very hard to achieve. Second time around, they ensured they weren’t on the deal by proposing a fee Aramco refused to pay.

Why Saudi Aramco’s IPO Was No Ordinary Share Sale: QuickTake

While work on the IPO had slowed to a crawl, the crown prince was still insisting the sale take place by early 2021. But in the summer, Al-Rumayyan became anxious the U.S.-China trade war was going to cause an economic slowdown, sending crude prices tumbling and ruling out an IPO for several years.

“The royal palace panicked thinking oil prices were about to crash,” said a person who has worked on the IPO for nearly four years. “They saw two options: rush the IPO immediately, or forget about it until much, much later”.

First, Saudi Arabia tried to juice the oil market, cutting production to 9.6 million barrels a day, more than 700,000 barrels a day below its official OPEC quota. For the kingdom, it was an unprecedented move. Even so the price of oil briefly dropped to close to $55 a barrel in August, below the $60 to $70 a barrel range that was needed to support the IPO.

Al-Rumayyan, convinced time was running out, decided the deal needed to be fast-tracked, persuading Prince Mohammed that if he wanted an IPO, he should put him in charge.

Paid the Price

Al-Falih, who mixed administrative ability with an abrasive style, paid the price for his opposition. He was removed as Aramco chairman on Sept. 3 and replaced by Al-Rumayyan. (He was replaced as oil minister a few weeks later.) The IPO’s champion now sat at the head of the company.

With little time to organize the deal, Aramco ruled out an international listing. But Al-Rumayyan still wanted to bring billions in international money into Saudi Arabia. To ensure success – and positive coverage from analysts – he hired almost every bank on Wall Street including Goldman Sachs, Morgan Stanley, Bank of America and JPMorgan.

Al-Rumayyan and Amin Nasser, the Aramco CEO, thought the IPO would be fairly easy. Only a few months earlier, the company had sold its first -- massively oversubscribed -- international bond.

Perhaps blinded by that success, Aramco walked into the IPO under-prepared. Despite four years of work, executives still struggled to answer simple questions from foreign investors, its legal team couldn’t produce documents on time, and nobody at Aramco could convincingly explain why Aramco deserved its $2 trillion valuation.

Then in the early hours of Sept. 14, a fleet of drones attacked the very heart of the Saudi oil industry – the giant crude processing plant at Abqaiq in the kingdom’s eastern desert. Half of Aramco’s production was knocked out in minutes.

Workers attend the drone- damaged site at Aramco’s Khurais oil field plant on Sept. 20.

Blamed Iran

The kingdom blamed Iran for the attack, but said there would be no interruption in oil supplies to customers around the world. Oil traders, looking at photos of punctured tanks and mangled pipework, were skeptical. Many assumed the IPO would have to be delayed.

Prince Mohammed told advisers a delay would be a victory for Iran. The new oil minister, the crown prince’s half-brother Prince Abdulaziz bin Salman, and Aramco CEO Nasser promised the damage could be fixed in weeks. Bankers on the IPO were told to keep working.

Saudi Arabia did everything they could to boost the valuation: tax rates were cut further and investors were offered incentives to buy the shares. The intention to float was finally announced by Al-Rumayyan and Nasser on Nov. 4.

But the feedback from international investors didn’t improve. At a meeting in the early hours of Nov. 17, Saudi Arabia decided to scale back the size of the IPO and scrap plans to market the shares internationally. A roadshow in London and other financial capitals was scrapped. The Wall Street banks, who’d fought so hard to get a mandate, were dumped.

The deal became what Prince Abdulaziz, the oil minister, described as “our family and friends” IPO, relying on local retail investors, rich Saudis and regional governments. The Saudi government even spent more than $2 billion of its own cash buying shares. An unsuccessful attempt was even made to persuade Qatar – under economic blockade by Riyadh – to make a large investment.

The deal got done. Prince Mohammed might even get his wish. In a press conference at OPEC’s Vienna HQ Prince Abdulaziz scolded the international press for their coverage of the IPO and said the company would trade at more than $2 trillion in a few months. On the first day of trading, the price jumped 10%, giving a market value of $1.88 trillion.

“Those who have not subscribed in Aramco will be chewing their thumb to the point that I will be worried about them that they go and fix themselves in the hospital,” the oil minister said later in an interview.

— With assistance by Archana Narayanan, Annmarie Hordern, and Nayla Razzouk