May 2012
If crisis creates opportunity, it should come as no surprise that merger and acquisition deals are blossoming throughout the MENA region during this, the second Arab Spring. And with a diversified economy and businesses that have been struggling, Egypt represents an especially fertile ground for M&A activity even with - or, arguably, because of - its transition to a democratically elected government.
Zawya, an online research portal, reports that the total value of deals in the MENA region decreased by 49 percent last year, despite a 45 percent year-on-year increase in the number of deals. But statistics from the first three months of this year would seem to indicate that the high volume, low value trend may have bottomed out. According to the Ernst & Young M&A Tracker, the number of announced deals in the region increased 3 percent and the total value rose 85 percent compared to the fourth quarter of 2011, attributable to the execution of several $500 million deals.
For the first quarter of 2012, 28 of the region's 126 deals were reported in Egypt, more than any other country in the region, according to Zawya. In terms of the total value, Egypt was second with $1.153 billion.
Compared to before the January 25th Revolution, "valuations of companies are becoming more realistic," says Helmy Ghazy, head of structured finance at HSBC Egypt. "It is getting closer to what M&A investors expect and therefore more attractive." In general, M&A deals take as long as a year for negotiations, due diligence and execution.
Ahmed Shehab, director and country head of Deutsche Bank, says the best time to execute an M&A deal is when an economy in decline bottoms out. "Right now nobody can predict where rock bottom is," says Shehab. "I sat with politicians, businessmen in the private and public sectors, and businessmen who are politicians and what what will happen next in Egypt is beyond anyone's ability to predict." Citing confusion regarding the status of the IMF loan, he says the possibility of a loan was a "positive sign," then the People's Assembly rejected it. The $3.2 billion loan is still on the table, with negotiations continuing.
One factor that is giving potential investors some encouragement is the slowing decline of international reserves. "We are bleeding, but we are bleeding less," says Shehab. Other signs that the worst may be over are increases in exports, Suez Canal revenue and remittances from Egyptians abroad.
Nonetheless, such positive economic signs come against the backdrop of continuing political volatility, such as recent protests over the disqualification of presidential candidates and anti-SCAF demonstrations in Tahrir Square. "Trying to forecast what will happen has become, more or less, a best-guess exercise," Shehab says.
The protests have contributed to volatility in the stock market, which is normally seen as a comparatively reliable indicator of investor sentiment and companies' value, making M&A opportunities easier to spot. "We have seen a lot of undervalued companies recently," says Ghazy, who believes it is an excellent time for investors to shop for M&A deals. "There are some attractive opportunities in Egypt and the MENA region."
The best opportunities will most likely involve EGX-listed companies, according to Mohsen Adel, deputy head of the Egyptian Association for Financing and Investment Studies. He expects a significant increase in IPO activity during the year as companies attempt to generate liquidity after a difficult 2011. Adel and Ghazy agree that investors who exited the market last year will most likely come back when they see feasible opportunities. "These investors will likely look at short- to medium-term liquid sectors with strong financial positions," says Adel.
Attractive opportunities are starting to emerge based on recent activity by private equity firms, which normally invest in a company for three to five years (medium term).
A 20 percent increase in exports to the EU from January through November 2011 caught the attention of Abraaj Capital, which announced plans to acquire three Egyptian export companies via its $2 billion Acquisition Fund 4. Abraaj has yet to announce details, pending the completion of due diligence.
Pharos Holding is also active, as CEO Elwy Taymour said in an Al Mal newspaper interview. Taymour indicated the firm has designated LE 80 million for acquisition opportunities and its investment banking division is working on four acquisition deals valued at a total of LE 500 million on behalf of foreign investors.
Motivated by concern over the survival of small state-owned companies, the government also is working on combining small textile companies into a few large companies. According to the Ministry of Trade and Industry, the focus will be on QIZ-certified companies, no doubt because of their advantages in exporting to the United States. The ministry justified the move by saying that 60 percent of output is lost because of low-tech manufacturing methods and that the new large entities would have enough resources to address the problem.
The Information Technology Industry Development Authority (ITIDA) also has been promoting mergers among small ICT companies in response to the current economic crisis. As announced by ITIDA, seven companies are preparing for a due diligence exercise. According to CEO Yasser El Kady, ITIDA's strategy since the start of the revolution has been to create a more consolidated ICT business environment to ensure the continued competitiveness of companies globally. A secondary benefit, according to El Kady, is that stronger companies will be less dependent on government support.
In addition, ITIDA is undertaking a program to help companies get listed with the Nilex, Egypt's stock exchange for small and medium enterprises, which will expose domestic companies to possible M&A opportunities. "I believe this is the best way to support the [ICT] industry," says El Kady.
The steel industry could be another attractive sector for mergers and acquisitions, according to a report by the metallurgical industries chamber of the Federation of Egyptian Industries. The report says opportunities will arise with the imprisonment of Ahmed Ezz, formerly a senior member of the National Democratic Party and owner of El Ezz Steel Rebars and Ezz El Dekhila, who built a virtual steel production monopoly. Mohamed Hanafy, head of the chamber, adds that with the Ministry of Trade and Industry freezing new licenses, international steel producers might be interested in acquiring and merging small producers that are struggling.
According to Hanafy, there are five troubled steel factories with production capacities from 80,000 to 200,000 tons per year that could be attractive targets given the strength of the real estate sector in Egypt.
Other appealing sectors are fast-moving consumer goods, financial institutions, oil and gas, and information and communications technology, according to Ghazy. Shehab adds textiles, "a sector that has traditionally done well in Egypt," and banks, several of which are owned by the Central Bank of Egypt.
According to Shehab, major deals will be made based on the resilience of the sector in which the target company operates rather than the size of the company or its position in the market. "Any sector linked to demographics, such as fast-moving consumer goods, will have huge potential," adds Ghazy, adding that tourism is unlikely to generate much M&A activity since it is so dependent on current events, both domestically and internationally.
For an M&A investor, ease of restructuring the target company is important. Shehab and Ghazy agree that M&A deals in the current environment need to be straightforward, without complications. Shehab recalls the Audi Bank acquisition of Cairo-Far East Bank: "It was one of the smoothest deals ever made. It was a bank that no one had heard of and restructuring happened overnight with a very low price." On the other hand, Misr International Bank and Société Générale took almost two years to complete their merger. "No one is going to want to enter into similar deals, at least for the time being," says Shehab.
Another significant factor is government policy and commitment to existing contracts in light of recent court rulings that invalidated the privatization of some companies. "Investors are mainly looking for stability," says Ghazy. Shehab adds that the re-establishment of a one-stop shop, with clear, transparent and consistent requirements for entering the Egyptian market, would be a big plus for foreign investors. "The real question is, 'Who is showing this commitment?' The current government is a temporary caretaker government in conflict with the majority political party in parliament," says Shehab.
Looking ahead, a sector-wide M&A strategy set by the government could prove successful, judging by how the banking sector performed after its M&A spree in 2004 and 2005. In late 2003, the Central Bank of Egypt (CBE) set a minimum capitalization of LE 500 million for domestic banks and $50 million for foreign ones. In addition to a freeze on new licenses, the CBE decided to allow foreign banks, which had been restricted to 49 percent ownership, to own 100 percent of domestic banks. The justification was that there were too many banks that were too small and unprofitable.
The change resulted in eight mergers and four acquisitions in two years, according to the Banking Sector Developments report published in July 2005 by the American Chamber of Commerce in Egypt. The number of domestic banks went from 60 to almost 30, and by the end of FY2005/06, the commercial banking sector's financial position grew by LE 71.7 billion, an 11.3 percent year-on-year increase, according to the CBE. This was followed by record-high rates of growth until the 2008 financial crisis, during which the resilience of the sector helped make the Egyptian economy the fastest growing in the MENA region.
While such wide-scale M&A deals in a single sector are not likely to recur, experts say good opportunities in a number of sectors should arise as economic struggles continue and deals get cheaper.
If crisis creates opportunity, it should come as no surprise that merger and acquisition deals are blossoming throughout the MENA region during this, the second Arab Spring. And with a diversified economy and businesses that have been struggling, Egypt represents an especially fertile ground for M&A activity even with - or, arguably, because of - its transition to a democratically elected government.
Zawya, an online research portal, reports that the total value of deals in the MENA region decreased by 49 percent last year, despite a 45 percent year-on-year increase in the number of deals. But statistics from the first three months of this year would seem to indicate that the high volume, low value trend may have bottomed out. According to the Ernst & Young M&A Tracker, the number of announced deals in the region increased 3 percent and the total value rose 85 percent compared to the fourth quarter of 2011, attributable to the execution of several $500 million deals.
For the first quarter of 2012, 28 of the region's 126 deals were reported in Egypt, more than any other country in the region, according to Zawya. In terms of the total value, Egypt was second with $1.153 billion.
Compared to before the January 25th Revolution, "valuations of companies are becoming more realistic," says Helmy Ghazy, head of structured finance at HSBC Egypt. "It is getting closer to what M&A investors expect and therefore more attractive." In general, M&A deals take as long as a year for negotiations, due diligence and execution.
Ahmed Shehab, director and country head of Deutsche Bank, says the best time to execute an M&A deal is when an economy in decline bottoms out. "Right now nobody can predict where rock bottom is," says Shehab. "I sat with politicians, businessmen in the private and public sectors, and businessmen who are politicians and what what will happen next in Egypt is beyond anyone's ability to predict." Citing confusion regarding the status of the IMF loan, he says the possibility of a loan was a "positive sign," then the People's Assembly rejected it. The $3.2 billion loan is still on the table, with negotiations continuing.
One factor that is giving potential investors some encouragement is the slowing decline of international reserves. "We are bleeding, but we are bleeding less," says Shehab. Other signs that the worst may be over are increases in exports, Suez Canal revenue and remittances from Egyptians abroad.
Nonetheless, such positive economic signs come against the backdrop of continuing political volatility, such as recent protests over the disqualification of presidential candidates and anti-SCAF demonstrations in Tahrir Square. "Trying to forecast what will happen has become, more or less, a best-guess exercise," Shehab says.
The protests have contributed to volatility in the stock market, which is normally seen as a comparatively reliable indicator of investor sentiment and companies' value, making M&A opportunities easier to spot. "We have seen a lot of undervalued companies recently," says Ghazy, who believes it is an excellent time for investors to shop for M&A deals. "There are some attractive opportunities in Egypt and the MENA region."
The best opportunities will most likely involve EGX-listed companies, according to Mohsen Adel, deputy head of the Egyptian Association for Financing and Investment Studies. He expects a significant increase in IPO activity during the year as companies attempt to generate liquidity after a difficult 2011. Adel and Ghazy agree that investors who exited the market last year will most likely come back when they see feasible opportunities. "These investors will likely look at short- to medium-term liquid sectors with strong financial positions," says Adel.
Attractive opportunities are starting to emerge based on recent activity by private equity firms, which normally invest in a company for three to five years (medium term).
A 20 percent increase in exports to the EU from January through November 2011 caught the attention of Abraaj Capital, which announced plans to acquire three Egyptian export companies via its $2 billion Acquisition Fund 4. Abraaj has yet to announce details, pending the completion of due diligence.
Pharos Holding is also active, as CEO Elwy Taymour said in an Al Mal newspaper interview. Taymour indicated the firm has designated LE 80 million for acquisition opportunities and its investment banking division is working on four acquisition deals valued at a total of LE 500 million on behalf of foreign investors.
Motivated by concern over the survival of small state-owned companies, the government also is working on combining small textile companies into a few large companies. According to the Ministry of Trade and Industry, the focus will be on QIZ-certified companies, no doubt because of their advantages in exporting to the United States. The ministry justified the move by saying that 60 percent of output is lost because of low-tech manufacturing methods and that the new large entities would have enough resources to address the problem.
The Information Technology Industry Development Authority (ITIDA) also has been promoting mergers among small ICT companies in response to the current economic crisis. As announced by ITIDA, seven companies are preparing for a due diligence exercise. According to CEO Yasser El Kady, ITIDA's strategy since the start of the revolution has been to create a more consolidated ICT business environment to ensure the continued competitiveness of companies globally. A secondary benefit, according to El Kady, is that stronger companies will be less dependent on government support.
In addition, ITIDA is undertaking a program to help companies get listed with the Nilex, Egypt's stock exchange for small and medium enterprises, which will expose domestic companies to possible M&A opportunities. "I believe this is the best way to support the [ICT] industry," says El Kady.
The steel industry could be another attractive sector for mergers and acquisitions, according to a report by the metallurgical industries chamber of the Federation of Egyptian Industries. The report says opportunities will arise with the imprisonment of Ahmed Ezz, formerly a senior member of the National Democratic Party and owner of El Ezz Steel Rebars and Ezz El Dekhila, who built a virtual steel production monopoly. Mohamed Hanafy, head of the chamber, adds that with the Ministry of Trade and Industry freezing new licenses, international steel producers might be interested in acquiring and merging small producers that are struggling.
According to Hanafy, there are five troubled steel factories with production capacities from 80,000 to 200,000 tons per year that could be attractive targets given the strength of the real estate sector in Egypt.
Other appealing sectors are fast-moving consumer goods, financial institutions, oil and gas, and information and communications technology, according to Ghazy. Shehab adds textiles, "a sector that has traditionally done well in Egypt," and banks, several of which are owned by the Central Bank of Egypt.
According to Shehab, major deals will be made based on the resilience of the sector in which the target company operates rather than the size of the company or its position in the market. "Any sector linked to demographics, such as fast-moving consumer goods, will have huge potential," adds Ghazy, adding that tourism is unlikely to generate much M&A activity since it is so dependent on current events, both domestically and internationally.
For an M&A investor, ease of restructuring the target company is important. Shehab and Ghazy agree that M&A deals in the current environment need to be straightforward, without complications. Shehab recalls the Audi Bank acquisition of Cairo-Far East Bank: "It was one of the smoothest deals ever made. It was a bank that no one had heard of and restructuring happened overnight with a very low price." On the other hand, Misr International Bank and Société Générale took almost two years to complete their merger. "No one is going to want to enter into similar deals, at least for the time being," says Shehab.
Another significant factor is government policy and commitment to existing contracts in light of recent court rulings that invalidated the privatization of some companies. "Investors are mainly looking for stability," says Ghazy. Shehab adds that the re-establishment of a one-stop shop, with clear, transparent and consistent requirements for entering the Egyptian market, would be a big plus for foreign investors. "The real question is, 'Who is showing this commitment?' The current government is a temporary caretaker government in conflict with the majority political party in parliament," says Shehab.
Looking ahead, a sector-wide M&A strategy set by the government could prove successful, judging by how the banking sector performed after its M&A spree in 2004 and 2005. In late 2003, the Central Bank of Egypt (CBE) set a minimum capitalization of LE 500 million for domestic banks and $50 million for foreign ones. In addition to a freeze on new licenses, the CBE decided to allow foreign banks, which had been restricted to 49 percent ownership, to own 100 percent of domestic banks. The justification was that there were too many banks that were too small and unprofitable.
The change resulted in eight mergers and four acquisitions in two years, according to the Banking Sector Developments report published in July 2005 by the American Chamber of Commerce in Egypt. The number of domestic banks went from 60 to almost 30, and by the end of FY2005/06, the commercial banking sector's financial position grew by LE 71.7 billion, an 11.3 percent year-on-year increase, according to the CBE. This was followed by record-high rates of growth until the 2008 financial crisis, during which the resilience of the sector helped make the Egyptian economy the fastest growing in the MENA region.
While such wide-scale M&A deals in a single sector are not likely to recur, experts say good opportunities in a number of sectors should arise as economic struggles continue and deals get cheaper.
© Business Monthly 2012
