Interest in Egypt’s assets from the wealthy Gulf has been building up over the past months, coinciding with increasing incentives that may cause stakes in the North African nation to be less undervalued in future acquisitions.
Sovereign wealth funds of the UAE and Saudi Arabia have been acquiring government-owned stakes in some of Egypt’s biggest companies over the past months, including shares in Fawry and Commercial International Bank (CIB) snapped up by Abu Dhabi’s ADQ last April.
Analysts say buyers of Egypt’s assets, which also include corporates, have been tapping underpriced stocks as the Ukraine war has pressured business sectors and weighed on the Egyptian Exchange (EGX), whose benchmark index has lost a third its value over the course of three years.
While currency devaluation comes with its own disadvantages, when it is backed by a friendly environment for investment, foreign investors’ cash flows usually follows.
Egypt has mostly hastened to accept takeover prepositions from the Gulf to hedge against a looming liquidity shock, with soaring commodity prices and mounting foreign debts turning up the heat on the most populous Arab country.
“The conditions of equity markets, whether in Egypt or abroad, are not good. Thus, they [the Egyptian government] preferred to sell directly stakes in state-owned companies to Arab sovereign funds,” Nemat Choucri, head of equity research at HC Brokerage, tells The Africa Report.
Weakening pound, IMF effect
Egypt plans to sell $40bn worth of state assets in the coming four years to enable the private sector to play a greater role in the economy, as strongly recommended by the IMF. It has also devalued the local currency by nearly 25% since March, as a more flexible exchange rate regime is required by the Fund to grant the third largest Arab economy a much-needed facility.
The Egyptian pound has exceeded 19.50 against the US dollar, coming within a whisker of its all-time low. With its downward trend expected to persist in the coming months, acquisition opportunities will be more appealing to foreign buyers, says Farah Mourad, senior market analyst at the Dubai-based XTB MENA.
“While currency devaluation comes with its own disadvantages, when it is backed by a friendly environment for investment, foreign investors’ cash flows usually follows,” she tells The Africa Report.
“Egypt is racing to fulfil the International Monetary Fund’s conditions to get the approval for the new loan programme. We believe once achieved, we could see a major boost in the price average of Egyptian assets.”
Last July, a major Egyptian property company, Madinet Nasr for Housing and Development, turned down an acquisition bid by rival SODIC, owned by ADQ and Abu Dhabi-based Aldar. The offer – LE6.18bn ($328m) for 100% of the company’s shares – did not reflect MNHD’s real value, said the firm, in which several state institutions own stakes.
Qatar increasing competition
Qatar, on the back of recent thawing ties with Egypt after political tensions for the better part of a decade, seems to have joined the race for prized Egyptian assets.
The Qatari wealth fund has been in negotiations to acquire state-owned 25% stakes in two key listed firms, Vodafone Egypt and tobacco producer Eastern Company, according to media reports in September. It also plans to inject investments in the Egyptian industry of hospitality.
The Qatari interest will barely counterbalance unfavourable market conditions in Egypt, but could result in a solid competition with the UAE’s bids, which have been dominant throughout the ongoing Gulf buying spree.
“We do believe so, especially with recent news of Qatari investments directed into Egyptian companies stakes through Qatar Investment Authority … one of the biggest [sovereign funds] globally in terms of assets [worth $450bn],” says Farah.
Deposits and investments from energy-rich Gulf nations have amounted to more than $22bn since the the beginning of the Russian invasion of Ukraine on 24 February 2022.
Tempting ports IPO
The potential IPO of a new company planned to merge seven key Egyptian ports, as the cabinet announced last May, would certainly draw more investments from the Gulf, says Mourad.
“Egypt offers a strategic location for trade routes between Africa, Europe, and Asia,” she says. “News about the merger of various ports into one entity that will be offered on the stock exchange will attract the attention of the Gulf to acquire stakes related to the Red Sea … passageway.”
The UAE, Saudi Arabia and Qatar have been splashing cash on developing and expanding their respective logistics sectors.
“Abu Dhabi Ports are already on the way to manage Ain Sokhna, while Qataris’ interest in Port Said has been already vocalised. It is only a matter of time [before we will] see Saudi’s interest in Egyptian ports, with NEOM (Saudi mega-city project) emerging on the Red Sea shore,” Mourad says.
Polishing EGX, firms
Some rules have recently been amended to facilitate trading and listing procedures, including allowing companies to be temporarily listed for a six-month compliance period before obtaining the regulator’s approval, and removing caps for purchasing and selling shares on margin.
Egypt seeks to raise up to $6bn before mid-2023 by selling stakes in state-owned businesses, either through public offerings or block sales to strategic investors, Planning Minister Hala El-Said, who’s also the chairperson of the Egyptian sovereign wealth fund, told Bloomberg.
The cabinet has also reiterated that the anticipated IPOs of Wataniya Petroleum and bottled water maker Safi, the first-ever two military companies to be listed on the EGX, will be launched this year, which along with state offerings should boost the market.
Wataniya and Safi, as well as other military and state enterprises, are reportedly being groomed by a pre-IPO fund, which Egypt’s sovereign wealth fund recently launched to restructure companies before floating their shares.
Choucri believes the pre-IPO fund will make upcoming offerings more attractive to investors, even though factors that have taken a toll on the investment appetite are still lingering.
While back-to-back global crises in the pandemic and the Ukraine war have faltered the market, the imposition of taxes over the years have also had a woeful incremental effect on the EGX. The most recent was the 10% capital gains, which was enforced this year on Egypt’s residents after being repeatedly put off.
Portfolios managed by Egypt’s asset management firms have shrunk due to such taxes, says Choucri. “Decreasing taxes will have the opposite effect and will push all sectors and ramp up trading volume, diversity, and liquidity,” she says.
Foreign investors, who have largely shied away from EGX stocks over the past years, “don’t like irresolution and lack of transparency, and we were quite irresolute many times … they want a market where they can find visibility, in terms of expenses and regulatory framework,” Choucri says.
After all, Choucri concludes, the EGX is a reflection of the economy, to which she believes a lifeline will be thrown when the private sector is not stifled by competition from the state.
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