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Aramco faces heat from banks on incentives after thin IPO deal

Aramco IPO

Aramco plans to sell 450 million shares, increasing the size of its IPO to $29.4 billion

Banks across the globe are demanding a bigger incentive fee from Aramco, following their meagre profits earned through the recently concluded IPO transaction.

On Sunday, Aramco said that it was utilising a “green-shoe option” to market a further 450 million shares, thereby augmenting the volume of its IPO to $29.4 billion, easily the largest listing ever recorded till date across the globe.

But, Aramco’s move to not sell its transaction worldwide led to several banks that participated in marketing the energy giant’s shares garnering less than $5 million each, which is a very meagre amount for such a mega transaction.

To offset this, the banks have now decided to demand an ‘incentive fee’ from Aramco through a term in the agreement which provides the Saudi government the option to pay banks additional money in case the listing had a positive outcome.

A source pointed out that this would keep the banks obligated in case Aramco decides to market further shares on a global exchange. Although the disbursement of incentives is widely practiced for IPOs in the US and Europe, it is not usual in the Middle East.

In September, the state-owned Saudi oil corporation chose nine banks as common global coordinators: JPMorgan (JPM.N), Morgan Stanley (MS.N), Bank of America Merrill Lynch, Citigroup (C.N), Credit Suisse (CSGN.S), Goldman Sachs (GS.N), HSBC (HSBA.L), NCB Capital and Samba Financial Group (1090.SE).

Before its launch, the IPO was cut down in size and scope, with the targeted valuation reduced from $2 trillion to $1.7 trillion, and the float trimmed down 1.7 percent of the organisation from the anticipated 2 percent.

And when foreign institutional investors, who believed that Aramco did not deserve over $1.5 trillion, did not seem too excited, the Saudi oil behemoth withdrew its plans of organising market shows in developed markets such as the United States and the United Kingdom.

Aramco paid merely 25 basis points as a base fee on its transaction volume, offering banks with barely over $60 million as profits as compared with the IPO of China’s Alibaba (BABA.N) in New York, which was the previous largest listing, garnered $300 million for the banks.

Three major banks derived a huge portion of the base fee from Aramco’s IPO as each of them obtained about $10 million.

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