Is Egypt's privatization program out of hibernation?

The program comes as part of a plan to boost public finances

  
A trader works at the Egyptian stock exchange in Cairo, Egypt, December 3, 2015.

A trader works at the Egyptian stock exchange in Cairo, Egypt, December 3, 2015.

REUTERS/Mohamed Abd El Ghany
A push for the state’s privatization program started with the ratification of law 2014 no. 32 to limit appeal rights on state-concluded contracts, and thus secure prior government privatization deals. The law aimed to reassure investors concerned by legal challenges brought against privatization deals and land sales dating back to the pre-2008 period, according to 2020 Investment Climate Statements.

The program comes as part of a plan to boost public finances through minority offerings on the Egyptian exchange.

Following the issuance of the law, government officials announced a whole series of state companies that would be sold in 2016 to the private sector, including three banks, eight oil companies, and four electricity companies. However, no further steps were taken in this regard during the year.

In 2017, the finance ministry said that it expected to raise up to EGP 7 billion through initial public offerings (IPOs) of state companies during the fiscal year 2018/2019, Reuters reported. However, no further details were announced.

The first specifics were shared a year later, when the government announced that it intends to offer stakes in a total of 23 state companies over the next two-and-a-half years, in order to raise EGP 80 million, according to Reuters. It is worth noting that the list included companies already traded on the Egyptian Exchange (EGX), five of which were later announced by the Cabinet in July 2018: Alexandria Mineral Oils Company, Eastern Tobacco, Alexandria Container and Cargo Handling, Abu Qir Fertilizers Company, and Heliopolis Housing.

While the statement did not specify the exact timeline nor include any details regarding the percentage offered of each company, a previous statement indicates that the government plans to offer from 15% to 30% of each entity.

In December 2019, the Ministry of the Public Enterprise Sector added three unlisted names to the list: El Nasr Mining Company, e-Finance, and Banque du Caire. The eight companies are planned to go public during the fiscal year 2020/2021, according to the Egypt 2020 Report by Oxford Business Group (OBG).

Market waves

The delays, according to Amr Hussein Elalfy, head of research at Prime Securities, are due to market headwinds. In 2018, for example, the first phase of the program, which focuses on stake sales by already-listed companies was delayed last year as the emerging markets sell-off hit the EGX.

By 2020, the more challenging market conditions following the onset of the global pandemic have reduced the prospects of IPO activity, including slowing a privatization program of government entities that were expected to boost the IPO pipeline during the year, according to OBG.

The result was that Egypt has put on hold its plans in June to offer stakes in state-run companies due to “unfavorable” market conditions created by the coronavirus pandemic, Public Enterprise Minister Hisham Tawfik told Bloomberg, dealing a setback to the country’s program to strengthen the economy.

Similarly, state-owned e-payments firm E-Finance delayed its IPO date to the final quarter of 2020 then to the first quarter of 2021.

Other companies Alexandria Containers, Abu Qir Fertilizers, and Sidi Kerir Petrochemicals have also pushed back plans to float more of their stocks, local press reported last June.

Towards the end of 2020, Tawfik told Bloomberg Egypt is readying to resume its stalled program to sell stakes in state-run firms. The minister, however, declined to identify the companies to be offered or provide a time frame for when they could be offered.

He attributed the decision to restart the program to the return of investors to the EGX and “an appetite that’s different now than what it was four months ago.”

Misses vs Hits

Plans for Heliopolis Housing fell through. In March, State-owned Heliopolis for Housing and Development (HHD) canceled its plans to offer a stake of up to 25% as part of the state privatization program, Hesham Aboul Atta, chairman of HHD’s parent company, the Holding Company for Construction and Development, told Hapi Journal.

The offering was initially set to include the sale of a 10% stake to a strategic investor, along with management rights, and another 15% on the bourse. However, the tender failed to attract any bids in February despite expectations that at least four companies would submit offers.

Prime’s Elalfy attributes this to the IPO setup which included the offering of a non-controlling stake, a thing that was deterring for most investors because it would give minority rights to them. He adds that Heliopolis Housing’s land bank might be large yet it was planned to be mainly controlled by the government even after the offering.

Ahmed Farouk, a financial analyst, expected in a March 2019 statement to Ahram Online that earlier the company’s offering will receive the same warm welcome on the stock market, however, given the current slow-down in the real estate market.

Tawfik told Bloomberg in June that officials would now look at reviving the company before “thinking again” about offering it to investors.

State-owned HHD has unveiled in October 2020 a new five-pillar strategy that would see the company develop EGP 100 billion worth of assets autonomously and through partnerships with private developers after scrapping plans to sell a stake with management rights, according to a regulatory disclosure.

However, one success story as of April 2020 was the offering of 4.5% of the shares of state-owned Eastern Tobacco Company in a private placement on the stock market in March 2019. The sale was nearly two times oversubscribed, with foreign investors obtaining 94% of the offered stock, according to OBG.

Elalfy notes that the offering saw some good demand, reflecting that the good offering always attracts the right investors.

The company was a “gold mine” that had acquired strategic importance because half of Egypt’s population consumes its products, increasing its allure to foreign investors, the local press quoted Farouk, a financial analyst, in early March.

The timing of the IPO had also been good, taking place after the exchange’s main index had reached the 15,000 points at that time and the Central Bank of Egypt (CBE) had lowered its interest rates on deposits as the US dollar depreciated against the Egyptian pound, Farouk added.

Meanwhile, Elalfy argues that the government did not offer more than 4.5% to have the controlling stake in the tobacco monopoly, he adds.

Securing potential

To ensure that any issues or challenges have been successfully addressed before listing, PwC suggests in its Executing a Successful IPO note a “consistent and clear public communication starting from the very first engagement with investors.”

Furthermore, the government needs to choose the right timing and pricing of the offering, while doing proper marketing, in cooperation with private investment banks, before its launch date, according to Elalfy.

He adds that it is significant to wisely choose the products to be offered in sectors that are of interest to both local and foreign investors. Some luring industries include non-banking financials, e-payment solutions, and fintech, he highlights.

PwC referred to the importing of appointing the right IPO leader and advisers with relevant experience and credentials to bring the project together.

Elalfy sees that the government should set a clear timeline for each offering, and not necessarily for the whole program, and on a case by case basis to gain the trust of investors.

In a nutshell, the guarantee of any successful IPO is not only having it subscribed more than once but also getting traded frequently and with high liquidity, later on, he highlights.

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