A media firestorm pitting a privatization valuation for retailer Omar Effendi as a whole versus each location separately has stalled the near-sale of a major state asset. Is the sum of the parts greater than the whole?
The sentiments of the economic nationalists opposing the Nazif government's renewed privatization program stood remarkably bare last month as a media firestorm raged over the sale price for 150-year-old department store Omar Effendi.
The Holding Company for Trade (HCT) had been nearing the end of negotiations with Saudi retailer Anwal Group, the lone bidder for the retail chain's 82 branches, for a price of LE 504 million. That figure was more than 60% higher than the next highest bid, which came just months earlier from Kuwait's Sultan Group and was, until Anwal stepped in, the highest bid received in the nearly decade-long quest to sell the retailer.
But when word of Anwal's offer leaked to the press, columnists and members of Parliament alike jumped on information they claim supported their argument that the bid price was still too low for a cherished national icon.
According to HCT Chairman Hadi Fahmy, the formal valuation process to sell Omar Effendi followed the Privatization Act (Law 203 of 1991) to the letter. Under that system, an independent auditor submitted a valuation for the company as a whole, an authentication committee formed at the direction of HCT reviewed the report, and the prime minister approved the valuation, which Fahmy says was a figure of "between LE 400 and 500 million."
However, the process was complicated by a request from the National Bank of Egypt (NBE), which was marketing the sale around the region, that HCT also value each retail location separately to increase prospective buyers' options.
As a result, HCT formed a second 'guidance' committee with government and public sector leaders.
Committee member Yehia Abdel-Hady, chairman of Benzione, another state-owned retail chain, says this committee valued the aggregate assets of Omar Effendi at LE 1.14 billion.
The press was whipped up not just by the staggering difference in the two valuations, but also by Abdel-Hady's insistence that the guidance committee was pressured by Fahmy to submit a lower figure using a different valuation method.
The outcry led to a formal request to the State Prosecutor's office to investigate both Fahmy and Minister of Investment Mahmoud Mohieddin. The investigation has since been suspended, with State Prosecutor Maher Abdel Wahed citing a lack of evidence to support Abdel-Hady's claims.
"I acted in the manner that I am accustomed to," says Abdel-Hady, who agreed to only speak briefly on the matter. "When I see something wrong, I have to speak out, especially if what I see is hurting the country's national interests."
None of the 15 remaining members of the guidance committee have spoken out to confirm, deny or interpret the LE 1.14 billion figure. All have, in fact, joined Fahmy for a joint press conference at which they denied they were ever pressured.
Abdel-Hady declined to comment on why no other committee member would back his allegations.
"This offensive is premature. We are still in the negotiation stages," says Fahmy. "The offer has not been submitted officially and it still has not reached the [holding company's] board of directors, so it's premature to try and shoot down this deal. And, sorry, but I will not color my words. That is exactly what this is all about now."
The deal was still on ice as of the end of March, when MPs unsatisfied with Anwal's bid again opened the issue for discussion at the People's Assembly.
Anwal officials could not be reached for comment.
Fahmy believes that by valuing each retail location separately and not taking into account Omar Effendi's considerable back-tax liability, back-office bureaucracy, overemployment and necessary repairs, he says the second committee's LE 1.14 billion valuation has an unrealistic overestimation of the company's worth.
Assets and liabilities
Back in July 2005, when independent auditor Ahmed Nour concluded its most recent valuation of Omar Effendi for the official call for bids, Fahmy made clear the holding company was serious about selling. With Mohieddin's privatization program in high gear, he figured the momentum was too great for the behemoth retailer, although the government has failed to sell it on four previous occasions.
Even in August, he knew the most important factor in finalizing the deal would be an accurate valuation.
"We don't want to be clever, but we don't want the buyer to be clever, either," Fahmy told bt in August 2005. "So the first thing to make sure you can finalize a deal like this is to have a proper estimate. You don't overestimate the price, and you don't give a low price."
Fahmy declined to state the official valuation determined by the first authentication committee and approved by the prime minister, citing the ongoing negotiations with Anwal, but did say it was in the LE 400 to LE 500 million range, including land assets. Twenty-eight store branches are located on government land, while the rest are on leased property. The Kuwaiti offer of LE 305 million was far below the estimate, and the initial Saudi offer came in well above it, he says.
However, in a report prior to Ahmed Nour's independent valuation for this bid round, the NBE pointed out the possibility that HCT might be forced to sell Omar Effendi stores separately, since all past attempts to sell the entire chain have failed, and asked that HCT commission a second valuation to address that possibility. HCT subsequently formed the second guidance committee, whose decisions and recommendations are not legally binding, but were intended to give HCT more leverage in negotiations in case it received one or more offers for portions of Omar Effendi.
El-Sayyed Salama El-Shokary, president of the guidance committee and also an HCT board member, says his committee estimated the market value of the company's assets, which do not take into account its current financial shape. Most importantly, he says the committee, which included Abdel-Hady, came to an important conclusion.
"Selling individual branches does not guarantee workers' rights or the continuation and development of company activities as is required by the conditions statement issued by the Holding Company," says El-Shokary. "This is what we state very clearly in our memorandum."
El-Shokary declined to directly confirm the LE 1.14 billion figure cited by Abdel-Hady, but says the figure does not take into account the store's excess labor, external debt and back taxes owed to the government.
Fahmy says the retailer owes more than LE 50 million in back taxes alone. Omar Effendi supports a workforce of nearly 6,000 and finally managed to break out of the red for the first time in five years in 2005, registering a profit of just LE 2 million. Considering these numbers, Fahmy says few can argue against the Anwal bid.
The offer, he says, indicates Anwal plans to spend LE 300 million post-acquisition on renovations, an average of LE 1,300 per square meter. Anwal and HCT have also agreed the former would keep 75-80% of the workforce and finance retraining. All laid-off workers are to receive early retirement packages to be financed by the buyer, which would amount to an additional LE 50 million at current public-sector retirement package rates.
After taking these future expenses into account, Anwal's offer for Omar Effendi ultimately approaches the LE 1 billion mark.
"Our goal is not ending the life of Omar Effendi," Fahmy adds. "Our goal is preserving Omar Effendi, but in a better form with continuously evolving business activities, higher profits and better employee salaries. That's our goal, and I say that's a sound objective."
The sick man of Egypt
Recognizing that a large number of his supporters and the public in general are opposed in principal to the sale not just of Omar Effendi, but of any other state-owned company, Abdel-Hady maintains he is only protesting being pressured by Fahmy to change the valuation he participated in calculating.
"The minister's [Mohieddin's] policy has been sell, sell and sell since he came to office," says Abdel-Hady.
"He is clearly proud of all the deals he's made in the past six months, and I think this is one of the reasons behind the acceptance of such a low bid for Omar Effendi."
With the rapid escalation of the controversy last month, Anwal has raised its offer to a figure Fahmy declined to disclose, but one that the public prosecutor's office reported is near LE 700 million. Fahmy says the new bid is a direct result of the negotiation team's efforts and is unrelated to the media frenzy the leak caused.
"This shows the competence of our negotiators," says Fahmy. "Why not accept an offer that surpasses your valuation? They could have quit with the first offer. But they are doing their jobs to the fullest."
Abdel-Hady counters that he is certain the increase in the Saudi group's offer came as a direct result of the public protest he helped start. Although he is still not satisfied with the second offer, he says he considers an LE 200 million increase in the sale price to be a modest accomplishment.
Although government and opposition newspaper columnists alike have hailed him as a national hero, Abdel-Hady says he does not like the attention. His committee's valuation, he says, is accurate and cannot be brushed aside as a real estate valuation as claimed by his critics. Omar Effendi stores occupy some of the most valuable retail space in the country, and he says the buyer needs to be charged accordingly.
"Neither I nor the Minister of Investment have pressured [Abdel-Hady]. Not him or anyone else," says Fahmy. "He doesn't have very much retail experience. He was originally in the Leadership Institute before coming into retail. He had no prior experience or understanding in retail or valuations. And now he's trying to be Karl Marx. It's unbelievable."
Others are simply opposed to the idea of releasing Omar Effendi, as a national symbol, to the private sector, especially at what they consider a relatively low price. Perhaps as a sign of support for the conservatives, Mohieddin joined Al-Akhbar readers last month in requesting the re-publication of a back-page cartoon featuring Omar Effendi, in the shape of an old man, complaining he was about to be sold out by the government for nothing after decades of service.
"If you ideologically oppose the selling of Omar Effendi, I respect you," says Fahmy. "If you tell me you prefer the government turn over management to the private sector and keep ownership, I respect you. But if you falsely accuse me, I don't respect you and I don't accept it. You have to offer alternative economic strategies. No one can deny the national value of Omar Effendi. But go tell an investor it is worth LE 1 billion, and they will tell you to sell it to someone else. If it is worth a billion, why is it not profitable? Why are you not making money?"
Anwal has made a concerted effort to stay out of the media frenzy about the pending deal. The Riyadh-based company specializes in women's and children's clothing and operates more than 140 stores across Saudi Arabia, where it employs a total work force of just under 600.
Fahmy says the company is looking to make its first investment in Egypt and fears losing the Gulf capital his company as well as MOI officials have worked so hard to attract. As always, he says, the fear is not losing this investor, but the signal losing this deal sends to other Arab and foreign investors.
"We have to market the idea of privatization," says Fahmy. "It's not about losing Anwal. It's about losing a whole group of investors that might chose to go to Jordan or Lebanon instead for their next investment because of the reputation we are giving ourselves of turning them away. We have to understand we are not the only ones on the field. There is very strong competition all around us."
But Abdel-Hady says he believes the main issue is not whether or not to privatize, but how the process is handled. All privatization deals should proceed with complete transparency, he says, and public opinion needs to be a major player instead of the decisions being made by a few high-ranking officials in MOI.
Meanwhile, El-Shokary argues the deal is as transparent as any previously finalized by HCT. Why, he asks his critics, would the government put itself in such an awkward position in the first place if it indeed had an inside deal with Anwal?
"If the issue of external pressure is true, wouldn't it have made more sense to just give us instructions to prepare a valuation for a lesser amount instead of having to deal with what we are dealing with now?" El-Shokary asks. "They could have just told us not to surpass a certain figure. What we are dealing with now is the result of complete transparency."
At press time, the deal was still on the negotiation table. If made, Anwal Group will assume control of 90% of Omar Effendi, with an option to go for 100% at a later date.
By Ahmed Namatalla
© Business Today Egypt 2006
