Tackling state companies: New public offerings in Egypt

Niveen Wahish , Saturday 30 Jan 2021

This year is likely to see serious steps to divest shares in state-owned companies

Tackling state companies
Tackling state companies

The time is right for further initial public offerings (IPOs) of shares in both private and state-owned companies, the chair of Egypt’s Financial Regulatory Authority (FRA) recently stated.

Over the past couple of years share offerings in various publicly owned companies have been put off due to unfavourable market conditions, first the emerging markets crisis of 2018 and then the Covid-19 coronavirus pandemic.

But this appears to be changing, according to Ahmed Hafez, head of Middle East and North Africa (MENA) research at Renaissance Capital. In the medium-term, market conditions should be favourable for share offerings, he told the Weekly.

Valuations are still cheap, but once offerings start with the more lucrative sectors, other could follow, he said.

There have been consistent inflows into equity funds in China and other Asian markets, and Egypt could also see investments, Hafez said. A research note by Renaissance Capital issued this week said that “backed by a more bullish case for emerging markets, equity funds have been seeing strong inflows over the past couple of months.”

It said that some of these inflows could find their way into the Egyptian market, adding that “foreigners ended the first two weeks of January buying LE606 million worth of stocks on the back of what seems like the widest valuation gap in years.”

Hafez recommended that the government be selective in the companies offered to whet investors’ appetites. E-finance is an example of a lucrative company, and its shares were in demand. Other potential candidates could be selected from companies in the education and healthcare sectors that continue to generate demand despite market conditions, he said.

Should the rally in commodity prices continue, there could be interest in companies manufacturing commodities such as fertilisers, he added.

In 2018, the government said it would sell stakes in 23 state-owned companies including Alexandria Mineral Oils, Eastern Tobacco, Alexandria Container and Cargo Handling, Abu Qir Fertilisers, and Heliopolis Housing.

At the end of 2019, the ministry of the public business sector said shares in the Al-Nasr Mining Company, e-Finance, and Banque du Caire would also be offered. Earlier in January this year it was announced that stakes in two companies affiliated to the National Service Products Organisation (NSPO) affiliated to the ministry of defence would be offered. The two companies are the National Company for Producing and Bottling Water, known as Safi, and Wataniya Petroleum, which owns about 200 petrol stations nationwide.

The decision to sells shares or to look for a strategic investor would depend on the company concerned, Hafez said. Selling stakes on the stock market would be beneficial because it needed depth, liquidity, and new ideas and names, he added.

“This is one of the reasons behind the sale of shares in state-owned companies, and it makes a lot of sense,” he said.

He said his company’s clients often said they liked the Egyptian market but did not find alternatives for investment. In the end, Hafez said, the decision whether to sell to a strategic investor or to float a stake depended on the company. Sometimes it could be better to sell to a strategic investor and then later organise a share offering, he added.

On a parallel note, the government started off this year with its decision to liquidate the Egyptian Iron and Steel Company.

The ministry had been reviewing the companies in its portfolio to find out which could be offered to investors and where new production lines could be added and which were unviable, Hafez said, adding that numerous studies had concluded that Egyptian Iron and Steel should be shut down.

However, the liquidation of the company is creating a debate nonetheless between those wishing to cut government losses and others believing the company could be resuscitated. The company, was established in 1954 when late President Gamal Abdel Nasser issued a decree to establish the first integrated steel production complex in the Arab world at a capital of LE21 million.

This week the Egyptian Centre for Economic Studies, a think tank, organised a Webinar to discuss the issue bringing together current and former officials and policy-makers.

Hisham Tawfik, minister of the public business sector, said the company had witnessed decades of losses, reaching LE7.5 billion in the 23 years from 1997-1998 to 2019-2020. He added that the Central Auditing Agency had estimated the real losses at about LE15.6 billion during the period, mostly to government bodies.

Tawfik said there had been attempts to attract investors, but these had failed, including one plan to attract a private-sector operator of the Company’s plants with the government shouldering the debt and extra labour. But this too had failed.

According to the law, companies that incur losses for more than three years without a clear plan for development have to be shut down, Tawfik said, adding that the decision to liquidate had been delayed for about four months until the spinoff of the Iron and Steel Company’s mining activities into a separate company had been secured along with funds to compensate workers.

The Company has 6,400 workers, with wage bills exceeding LE850 million annually. Around 150 workers could be redeployed to other companies affiliated to the Holding Company for Metallurgical Industries, the minister said.

Mounir Fakhry Abdel-Nour, a former minister of industry and a supporter of the liquidation, explained that the relative importance of the iron and steel industry as a basis for industrialisation had declined and given way to the petrochemical industry, the products of which were now essential for major industries such as automobiles.

He called for the proceeds of the liquidation of the Iron and Steel Company to be used to build a petrochemical complex, which would need huge investment. Abdel-Nour said that obsolete iron and steel plants were being closed down in many countries, he pointed out.

Egypt’s current factory production of iron and steel is 112,000 tons annually, which represents less than one per cent of production capacity, which amounts to 12 million tons, Abdel-Nour pointed out. In the meantime, consumption reaches around seven million tons annually, of which three million tons are imported.

He used these figures to demonstrate that selling assets to try to develop the Company would be wasteful as its production would be facing an already glutted market, and it could mean exposing existing companies to bankruptcy.

As the Iron and Steel saga continues, other companies may follow, though it would be difficult to predict which could meet the same fate, according to Hafez. Tawfik said during the ECES Webinar that of about 120 public business sector companies, 48 ​​were loss-making. They had been established with an investment of LE16 billion, but they had lost LE44 billion over the decades. Moreover, they had received an additional LE60 billion in investment despite their losses.

These loss-making companies are being studied on a case-by-case basis, Tawfik said. Before Iron and Steel, the National Cement Company had also been liquidated owing to a lack of vision regarding its development, especially in the light of the excess supply of cement by existing producers.

Another that has been liquidated is the Egyptian Company for Navigation, also seen as not having a viable future. Tawfik said that in the event of a decision to continue investing in this sector, investment would be made in the National Shipping Company instead.


*A version of this article appears in print in the 28 January, 2021 edition of Al-Ahram Weekly


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