NEW YORK (Reuters Breakingviews) - Economic boycotts are usually designed to force dramatic change. They deprive enemies of income that can be used to finance armies, feed propaganda machines and sustain populations - with the hope of provoking the target’s people to overthrow their leaders. Saudi Arabia, the UAE, Egypt and Bahrain have followed much of this playbook since early June in their ostracism of Qatar, which they accuse of financing terrorism.
The four Arab neighbors have cut diplomatic ties and trade links with Doha, and suspended air and shipping routes with the gas-rich nation. They issued a 13-point ultimatum insisting, among other things, that it scale back ties with Iran and muzzle the Al-Jazeera cable network. Thus far, Western companies have not been overtly punished for maintaining their ties with Qatar. And U.S. companies will not be, according to a letter the quartet of nations sent to Secretary of State Rex Tillerson in July, Reuters reported over the weekend.
One exception may be companies who count entities controlled by the Al Thani monarchy, primarily through Qatar’s $300 billion-plus sovereign wealth fund, as important shareholders. If so, these regional grievances may alter the trajectory of one of the biggest deals in the history of global capital markets, the planned initial public offering sometime next year of the $2 trillion Saudi Aramco.
The Qatar Investment Authority was founded in 2000 “for the purpose of investing Qatar’s revenue surplus.” It began aggressively acquiring big stakes in European and U.S. companies around the financial crisis. Among its largest holdings today are chunks of Volkswagen, Iberdrola, Barclays, Vinci, J Sainsbury, Tiffany & Co, and Credit Suisse, according to Reuters Eikon data.
Two of those firms, Credit Suisse and Barclays, were particularly welcoming to the Qataris in 2008 when capital was scarce. The fund bought into the Swiss bank early that year and owns 4.2 percent today. It snaffled up Barclays stock when its own shareholders shunned a capital call in July 2008, giving it a stake of just under 6 percent at present. Those two investments are now worth $4.3 billion.
Trouble is, what was a source of stability during the crisis may now provoke anxiety. Abu Dhabi launched an informal boycott of Credit Suisse and Barclays, according to a report in the Financial Times last week. An unidentified banker told the newspaper that “there is no public blacklisting, but behind-the-scenes skullduggery” that will prevent the two banks, along with Deutsche Bank, in which members of the Qatari royal family have taken large stakes, from receiving significant banking mandates in the emirate.
This would be a natural extension of the boycott, which has since been joined by Mauritania, Senegal, Yemen and others. Indeed, if UAE dignitaries shun Claridge’s because the London hotel is owned by Qataris, it stands to reason they would question the wisdom of rewarding banks with lucrative assignments, such as the IPO of the retail business of Abu Dhabi National Oil Co (Adnoc). After all, those underwriting fees serve to enrich shareholders like the QIA. Adnoc chose First Abu Dhabi Bank, HSBC, Bank of America Merrill Lynch and Citigroup to handle the IPO.
Which brings us to the mother of all capital-markets deals, the listing of Saudi Arabia’s national oil leviathan. Before the Qatari kerfuffle, the kingdom, in consultation with advisers including Michael Klein and Moelis & Co, selected three banks to lead prep work on the IPO: JPMorgan, Morgan Stanley and HSBC. That arguably puts them in pole position to lead the underwriting, though dozens of banks will compete for positions in the deal to enhance their rankings in the league tables that help them to market future investment-banking business.
What has not been decided yet is where the company will list, beyond Riyadh. Nabbing the richest company on earth is a prestigious prize for the leading, and competing, financial centers, led by London and New York. As my colleague Peter Thal Larsen wrote (reut.rs/2vZli96): "Attracting Aramco would be a big endorsement of UK capital markets as Britain prepares to leave the European Union." That's why the Financial Conduct Authority relaxed its stock-market rules in July to make it easier for state-controlled enterprises to list their shares in London.
Here lies the rub. One of the top holdings of the QIA is a 10.4 percent slice of the London Stock Exchange, a company in which the wealth fund first invested 10 years ago. Though it has reduced its stake over the years, the Qataris are still the LSE’s leading shareholder. That means the QIA has the most to gain from all the fees Aramco would generate for the London bourse from its listing, and onwards. It would also benefit from any halo effect granted by winning the mandate over the New York Stock Exchange, whose parent, Intercontinental Exchange, counts the wealth fund of neutral Kuwait as a big shareholder.
There are many other factors that should influence the Saudi monarchy’s choice of IPO venue, including disclosure requirements, trading volumes, legal liabilities, the relative valuations of oil assets and so on. And there’s no certainty that what, say, Abu Dhabi decides to do with its finances should make any difference to the Saudis. But the principles of economic boycotts would suggest that what happens in Qatar may be felt in the City of London and on Wall Street.
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