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The mystery of the world's second-richest businessman

Prince Alwaleed is the modern face of Saudi royalty, but his sums don't add up, writes The Economist

THE wealth of the ruling family of Saudi Arabia is not normally attributed to business acumen, financial probity or hard work. An exception is the multi-billion-dollar fortune of Prince Alwaleed bin Talal bin Abdulaziz Al Saud. Chairman of his own company at 14, a billionaire at 31, Prince Alwaleed, now 41, is a self-made businessman who has amassed a fortune that he estimates is worth $14.3-billion. Last year Forbes magazine ranked him behind Bill Gates as the world's second-richest businessman. Among the grandchildren of Ibn Saud, the warrior who united the Arabian peninsula in the early years of this century, none enjoys greater prestige.
The prince's renown must delight Saudi Arabia and its allies. The royal family's extravagance and greed have long been an embarrassment - particularly to those who came to Saudi Arabia's aid after Iraq's invasion of Kuwait in 1990. Here, at last, is something to cheer about: a royal prince who is clean-living and generous. And one who has demonstrated a remarkable capacity to make money through hard work and intelligence.

The world has heaped praise on Prince Alwaleed. He is admired as an internationally minded, long-term investor with a record for identifying undervalued companies. Time magazine has labelled him an "Arabian Warren Buffett". Forbes has described him as one of the world's shrewdest investors. In an article in 1995, Business Week said that by 2010 he could be "the most powerful and influential businessman on earth".

Meeting the prince, it is easy to be impressed. Energetic and articulate, he is the sort of man who can sit through hours of meetings, tirelessly pressing his advisers with penetrating questions. In his offices in Riyadh, he has surrounded himself with a young team of well-educated workaholics who clearly admire him. Outside Saudi Arabia, he has built up a network of world leaders and businessmen.

However, his business empire has a mystery at its heart. The Economist has interviewed the prince and his entourage, and examined the accounts of dozens of the companies in which he has a stake, as well as his filings with America's Securities and Exchange Commission (SEC). Our research raises two doubts about Prince Alwaleed. The first concerns the true extent of his success as a stock market investor; the second, the land deals that are the source of much of his income.

During the 1990s Prince Alwaleed's empire expanded at a frantic pace, far beyond its origins in Saudi Arabia. The portfolio is eclectic. His holdings, typically minority stakes, include interests in media, telecoms, information systems, banking, retailing, property, entertainment and hotel-management. He also owns luxury hotels, mostly in partnership with other investors.

The sheer diversity of these investments reflects Prince Alwaleed's view of himself as a bargain-hunter and deal-maker. In his investments outside Saudi Arabia, Prince Alwaleed's role is usually passive. His chief advantage is the cash he has on tap. If a company is suffering from a funding crisis, the prince is one of the world's few private investors who can readily write a cheque for hundreds of millions of dollars.

The combination of high risk and sweetheart deals should yield exceptional returns. Citicorp, Prince Alwaleed's debut as an international investor, shows how well this approach can work. By the autumn of 1990, the bank, then America's largest, desperately needed capital. But Citicorp's search for more than $1-billion from investors had been fruitless. Amid fears that the bank might fail, its shares had plunged.

Enter Prince Alwaleed, then barely known. At the end of 1990 he bought 4.9% of Citicorp's existing common shares for $207-million ($12.46 a share). In February 1991, the prince spent $590-million buying new preferred shares, convertible into common shares at $16 each. This amounted to another 10% of Citicorp, taking his stake to 14.9%.

For a novice, Prince Alwaleed's timing was astonishing. Two weeks later Citicorp's capital crisis passed when a group of international investors bought a further $600-million of new preferred shares. By 1994 the bank's share price had soared and the prince had made his reputation - as well as his fortune.

Citicorp is the perfect example of the exceptional returns that Prince Alwaleed's approach can yield. Unfortunately it is also a rare one. Taken as a whole, Prince Alwaleed's other listed investments outside Saudi Arabia have barely kept pace with their local stock markets. According to The Economist's best estimates, the $2-billion that he has invested in shares after 1992 is now worth $2.8-billion. If the prince were a US mutual fund, his performance would rank in the bottom half of the industry.

One investment in particular has dragged him down. The prince's well-publicised rescue of Euro Disney, listed on the Paris bourse, in 1994 looks like a grave error of judgment. With prospects at Euro Disney bleak, his investment has lost over 25% of its value, whereas the SBF 250 index has more than doubled. And Euro Disney is not the only poor performer.

Moreover, while Prince Alwaleed prides himself on knowing when to buy, he has yet to demonstrate that he knows when to sell. At its peak in April 1998, shortly after Citicorp announced plans to merge with Travelers, an insurer, his stake in Citicorp was worth $7.6-billion. But shares in Citigroup (as it is now known), along with those of other banks, have declined sharply and the value of his stake in the merged group has since fallen by 21%.

None of this would worry the prince. His investments are for the very long term: Citigroup, for example, is "taxiing for take-off again"; with Euro Disney he intends to "be patient and wait". Oddly, neither has it seemed to worry his admirers. Perhaps it is because Prince Alwaleed's stellar reputation is founded more on the sheer scale of his investments than on performance.

And that leads to the second doubt surrounding Prince Alwaleed. He has not earned enough income from his investments to pay for all that he has spent in the 1990s. The mystery goes back to that first stake in Citicorp. The prince has declared that this money came entirely from his personal funds. He says he started out in 1979 with a loan of just $30 000 from his father. He also mortgaged a house that his father had given him, raising something like $400 000. And each month, as a grandson of Ibn Saud, he receives $15 000. You could barely clothe a Saudi prince for such sums, let alone furnish him with a multi-billion-dollar empire. Nevertheless, by 1991 Prince Alwaleed had felt able to risk an investment of $797-million in Citicorp.

Any investor acquiring 10% or more of a US bank needs approval from the Fed. This legislation did not prevent Saudis from fronting for the crooked Bank of Credit and Commerce International in its illegal purchase of First American Bank shares in 1982.

At the end of 1991, after a temporary waiver, the prince filed an application regarding his 14.9% stake in Citicorp. Most such applications are approved within 60 days, but after 14 months, the Fed had still not given him the go-ahead. In 1993, the prince says, he "got the message" and withdrew his application, selling enough shares to bring his holding in Citicorp below the 10% threshold. Those shares would be worth $1.8-billion today, but the prince sold them before Citicorp's value really took off, and he raised only $364-million.

The Fed is the only regulatory body ever to have publicly investigated Prince Alwaleed. It will not comment on why it did not approve his application. However, the prince looks to have been a forced seller. He himself acknowledges that he "had to play by the rules in America". When he sold, he disposed of the absolute minimum number of shares required by law.

Citicorp was only the beginning. Since 1990 the prince's empire has consumed roughly $4.5-billion. The prince rarely sells any investments and has denied that his wealth is inherited or a gift. Where has it come from? His possible sources of money are a) funds managed for others; b) borrowings; c) investment income; and d) trading.

In filings to regulators, Prince Alwaleed has declared that the money he has invested is his own. What about borrowing? When buying hotels, the prince has sometimes borrowed against the building he is purchasing - whatever his need for cash, this reduces his tax bill. At least once, he has also used shareholdings as collateral to buy shares. However, the prince insists that he avoids debt, and his declarations to US regulators confirm this.

That leaves dividends and trading as Prince Alwaleed's chief sources of cash. His investments outside Saudi Arabia reflect a desire to maximise long-term capital growth, rather than dividend yield. That is why his quoted international investments yielded only $108-million last year, and his $1-billion war chest, $50-million.

His unlisted international ventures yielded only a further $35-million or so. The prince has invested in an Arab satellite-television network and Teledesic, an ambitious telecoms project, neither of which is yet paying dividends. He also owns property and hotels. But the prince does not receive much income from these - like most hoteliers, his profits will come in the form of capital gains. And, far from being a seller, Prince Alwaleed has been investing.

That leaves the prince's businesses and investments in Saudi Arabia. He owns stakes in three main quoted businesses, a bank, a food-industry conglomerate and a venture-capital outfit. But these are relatively small investments and, all told, yielded $30-million last year.

What does all this amount to? The prince puts his total assets at $14.3-billion. His investments outside Saudi Arabia are worth $11-billion. He has quoted investments in Saudi Arabia worth roughly a further $700-million. And he has $1.1-billion of cash. This total of $12.8-billion of assets earned Prince Alwaleed $223-million.

Really? The prince estimates that his investment income was $500-million last year. So his remaining assets, worth only $1.5-billion, just over a tenth of the total, earned $277-million, over half of his income. And that is not all. Roughly $550-million's worth of private Saudi assets, including his palace, aeroplanes and yacht, do not produce any income. Neither do other assets, such as three unfinished property developments.

Most assets have a cash yield of a few percent, yet Prince Alwaleed makes $277-million from assets to which he attributes almost no value. This does not make sense: like most well-known billionaires, Prince Alwaleed is not a man to underestimate the size of his fortune. The prince explains that he makes money as a Saudi agent for foreign firms and by trading land, most of it in and around Riyadh. But, in the normal run of business, agents do not make such sums. And the prince himself says that the property market in Riyadh last year was poor. In November 1998, in the prospectus to his largest property development, the Kingdom Centre, the prince acknowledges that "the real-estate sector in Riyadh has been depressed for several years".

The inescapable conclusion is that estimates the prince has given to The Economist and several other publications are wrong. Either the prince has a valuable and unrevealed source of income, or his income is much less than $500-million.

What about previous years? In addition to his net investment of $2.5-billion in quoted shares outside Saudi Arabia during the 1990s, the prince's projects include hotels; Canary Wharf in London; and telecoms and television ventures. Though hard to quantify precisely, these amount to another $1-billion. Prince Alwaleed has $1-billion in cash at any time and says he gives $100-million a year to charity.

In short, the prince has had roughly $5.5-billion to spend in the 1990s. But this exceeds his identifiable investment income in those years. The prince explains that much of the remaining money - which The Economist estimates amounts to at least $1.5-billion - was made in the mid-to-late 1980s, again through buying and selling land. There are no public records of these astonishing deals, and the prince does not give examples from that era. Yet chartered surveyors who were working in the Middle East between 1986 and the Gulf war say the market was "flat" throughout that period.

There is another curiosity too. The prince relishes publicity. Yet he became known in Saudi Arabia only in 1988, when he bought a stake in United Saudi Commercial Bank, which cost him a mere $10-million. Until then, the man who was pulling off land deals worth billions of dollars, remained, in his own words, "barely a blip on the radar".

Whatever the history of the prince's land deals, there may be problems ahead. He says it is hard to make money trading land these days. If so, the cash engine that has driven both his expansion and his growing fame is exhausted. Perhaps that is why a brilliant short-term property trader has become an average long-term stock market investor. It may also explain why the prince has not made any large investments in the past ten months, and why he has sought partners to help bear the cost of various Middle East schemes.

More than just Prince Alwaleed's personal fortune is at stake. Saudi royalty needs its heroes. The family is secretive, venal and backward: in Prince Alwaleed the world sees a man who is open, intelligent and successful. Yet the prince gives inconsistent figures for his earnings and assets - the two basic measures of his success. Anyone who seeks to present Prince Alwaleed as the face of the new Saudi Arabia needs to explain the mystery that lies at the heart of his empire. - The Economist Newspaper Ltd, London 1999

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