Three parallel programs are addressing the 169 remaining public enterprises and assets and shareholdings in public enterprises and joint ventures.
- Sales of assets and shareholdings in public enterprises and joint venture entities.
- Restructuring of other public enterprises, tailored individually to lead to their eventual sale.
- The introduction of corporate governance principles and practices to improve and revitalize management in state-owned-enterprises.
Sales
The Egyptian government renewed its commitment to withdraw from the business sector, giving way to private sector investments. Twenty-eight transactions, valued at LE 5.6 billion, took place in the financial year ending June 30, 2005 – double the total proceeds of the previous four years. Sales included public enterprises and joint ventures.
The momentum continued into July with four transactions realizing LE 2.9 billion, adding up to a total of USD 8.5 billion in almost 12 months. The sales of 12 separate public sector stakes in joint ventures contributed LE 4.8 billion, which was 84 per cent of the total proceeds. They included sales in top-notch sectors such as cement, petrochemicals, tourism and banks.
Restructuring
Operational restructuring
Operational restructuring has acquired more impetus in recent months. The decision to invest in restructuring is taken with a view towards:
- Prioritizing the restructuring of the companies that would lead to a sale in the short term.
- Restructuring companies that could not be sold in the short run and requires an extensive plan with a possible cash injection.
o They include large entities requiring enormous efforts to keep them afloat. Egyptian Iron and Steel’s initial Phase One restructuring plan cost LE 280 million.
o Many spinning and weaving companies and several food manufacturing and distribution companies need restructuring before being offered for sale.
o Recently, the holding companies’ general assemblies of other public enterprises have endorsed restructuring plans, tailored to lead to their eventual sale.
- The Financial and Technical Feasibility provides an essential benchmark and yardstick to measure the criteria for decision making. From an investment point of view, the feasibility of injecting funds is one aspect of restructuring.
Financial restructuring
The asset management department has finished compiling public companies' total indebtedness to public and private sector banks. The process is a step toward negotiating the settlement figure with the Central Bank of Egypt and the Ministry of Finance to find the best alternative to resolve companies’ high financial leverage.
- For the fiscal year ending June 30, 2004, total loans extended from commercial public and private banks to Law 203 companies reached EGP 37.2 billion (175 affiliated companies) representing 13% of total extended loans. (During fiscal year 1992/93, 314 law 203 affiliated companies total indebtedness reached EGP 29 billion representing 47% of total extended loans at that time.)
- Preliminary negotiations were held between the Ministry of Investment, the Central Bank of Egypt, and the Ministry of Finance to consider issuing bonds backed by the Ministry of Finance to redeem Law 203 companies' total indebtedness. The amount has not been confirmed yet.
- Annual installments in addition to accrued interest are to be paid by holding companies through proceeds of sales of affiliated companies and their assets and through internally generated collective revenues.
- A letter of intention between the three parties has been completed and is awaiting signature.
General Assembly meetings
New members were selected to join the general assemblies and boards of directors of several holding companies to inject new vision into management, utilizing their expertise.
The general assemblies of the holding companies are scheduled to hold meetings at least every two months to
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Receive reports on restructuring of its affiliates.
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Discuss negotiations with interested investors.
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Take decisions whether to approve the sale of any affiliate company or asset.
Ministers have been invited to attend some general assemblies’ meetings to discuss the technicalities surrounding the future of public enterprises.
Corporate Governance
Procedures were implemented to empower managements and enhance the role of the general assemblies to track and appraise management’s decisions.
- Two deputies from the younger generation with financial and technical backgrounds were appointed to assist each company chairman to contribute a wider vision.
- For the first time, the minutes of general assembly meetings are being posted on the new portal of the Ministry of Investment.
- The Institute of Directors is being given a larger role. Their members are being invited to apply corporate governance principles and skills to public enterprises. They bring new blood to the management of holding companies and the affiliates, including their boards of directors and general assemblies.
- Most recently, a draft of Guidelines for Corporate Governance base on OECD principles is being finalized in Arabic and English.
Mergers and acquisitions
Merging companies to form larger entities to survive in a competitive environment is a strategy adopted by the Ministry of Investment working closely with company chairmen.
- During 2004/2005 three affiliates in the Holding Company for Transport were merged into one: the Egyptian Co. For Transport and Touristic Services and Alexandria for Automotive Services and Maintenance were merged into the Engineering Automotive Company. Middle Delta Bus will also be merged into West Delta Bus.
- Transferring an affiliate from one company to another, more relevant to the company’s activities, was studied.
o The transfer of the Arab Bureau for Design from the Holding Company for Trade to the Holding Company for Construction was approved by the general assemblies.
o The transfer of the General Nile Co. for River Transport was from the Holding Company for Metallurgical Industries to the Holding Company for Transport was recommended.
De-mergers
Four irrigation and drainage companies that had been privatized within the past 10 years in sales to the Employees Shareholder Association (ESA) have been returned to public ownership: the Mechanical Excavation Company; the Egyptian Irrigation and Drainage Company; the Upper Egypt Dredging Company and the Egyptian Dredging Company.
The Holding Company for Trade’s general assembly approved the measure on 14 June 2005 in view of a deteriorating financial situation which threatened employees’ jobs and the companies’ future.
The holding company is drafting a plan for the four affiliates which includes a restructuring schedule for the coming 18 months.
Labour
More than 406,000 thousand people work in the public business sector, some 25 per cent of them in the Cotton Holding Company.
- The Ministry is preparing a detailed public business sector employee database including their names, positions, previous jobs, the date they joined the company, credentials and training received.
- The database will be used to guide decision making regarding posts, training and transfers.
A new early retirement scheme has been introduced giving workers better severance packages if they voluntarily ask to be retired early. Since 1997 early retirement has been an option under Law 203/1991.
· 25 per cent of the amount of money to be paid in cash to an early retirement employee with the remainder put on deposit at a bank.
The old system had been criticized for failing to keep pace with the rise in the cost of living.
· The Minister for Investment, Dr. Mahmoud Mohieldin formed a special committee by decree No. 21, 2005 to study the current early retirement system and to recommend solutions.
o The committee comprised the legal advisor to the Minister, the advisor to the Minister of Social Affairs, Industrial and Labour Relations Unit, an actuarial expert from the Insurance Authority, members of the labour unions, and representatives from the nine holding companies.
o The committee proposed a new system that took into account the problems of the old system.
o The recommendations await final revision from the ministries concerned.
The Ministry places special emphasis on public business sector employees, recognizing them as one of Egypt’s key assets.
- Dr. Mohieldin initiated new guidelines to empower employees.
- The Minister insisted that employees be part of any privatization negotiations so that their voice is heard loud and clear and so that their rights are not undermined. "We know that some will blame us. We know that negotiations will be more difficult and lengthy. But we are not going to deprive employees of their right to represent themselves," the Minister told a general assembly meeting.
The ministry works closely with other Ministries for the benefit of employees.
- The Ministry coordinates with the Ministry of Labour to resolve labour disputes in public and private companies as well as in drafting a national youth employment strategy.
The ministry coordinates with the Ministry of Finance to promote and facilitate the establishment of small and medium size enterprises to stimulate job creation.
The ministry coordinates with the Ministry of Social Affairs and other ministries to create a comprehensive safety net for all Egyptians. The objective of the Social Safety Net is to guarantee a minimum standard of living and social welfare for all Egyptians.
The Ministry of Investment works with foreign partners to improve the status of Egyptian labour and Egyptian organizations.
- An agreement was signed with the European Union on the 30th September 2004 granting the Ministry of Investment € 80 million to restructure the Cotton and Textile sector to improve companies’ performance.
- A major part of that grant is directed towards employee development and restructuring.
- In March, 2005, the Minister of Investment signed an agreement with the Social Fund for Development (SFD) which enabled the Holding Company for Cotton, Spinning and Weaving to review the labour situation in its affiliated companies.
- Some employees who volunteered to retire early did so with full financial benefits.
- Younger employees wanting to move to other jobs were transferred to "Labour Pools" under the supervision of the SFD. They will be given training and advice on how to move to other jobs and on how to start their own businesses.
Joint Ventures
Sales procedures
Financial criteria
The criteria for determining joint ventures sales include:
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An investor’s wish to invest in a specific company in the joint venture portfolio.
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The holding companies’ plans for selling shares in joint venture companies.
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The joint venture unit’s vision of diversity of sectors and companies to be offered for sale.
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Keeping a balance in the market with respect to the timing and volume of shares offered or sale.
The future sales of more than 89 companies, assets, and stakes in joint ventures are underpinned by
o Fact sheets and summarized information about a batch of 46 companies and major assets governed by Law 203 are included in the sales program, in addition to stake-holdings in 43 joint venture companies and many more assets have been distributed to potential investors and posted on the ministry’s portal.
o The Ministry of Investment is publishing, for the first time, the minutes of the annual general meetings of the assemblies of the nine holding companies. They are available on the ministry’s portal and in hardcopies. Law 203 empowers the general assemblies to make final decisions on any aspect of the asset management program, including asset sales and performance evaluations of the boards of directors of holding companies.
o The Asset Management Sales Program is demand-driven. Sales are not restricted to listed companies and assets. If serious expressions of interest are received almost any company is “for sale”. The approach is to be reactive to unsolicited interest and proactive to develop demand.
o The sale of loss-making enterprises represents a real challenge. Yet several transactions in the last nine months included distressed units. Assessing each case on its merits, the Ministry of Investment intends to be flexible when placing a valuation on loss-making entities before offering them for sale. The modified vision of the government is to take into consideration the “opportunity cost” of refusing an offer, retaining a loss-making asset that requires huge funds to keep afloat facing the competition.
o Three textile companies valued at LE 100 million were sold in a sector that saw more than three unsuccessful offerings in 2003/2004.
o Where possible, the government would rather the private sector undertakes restructuring with improved management, expertise, financial acumen and access to markets, thereby lifting the burden off the state prior to sale.
o As a rule of thumb, a stake in companies being sold to strategic investors is offered in a public flotation to stimulate the stock market. Also, minority stakes in highly profitable companies that are not expected to be fully privatized in the short term will be launched on the stock exchange; pharmaceutical companies are one example.
o Recent large transactions that stimulated the stock market are the Suez Cement Company, a stake in Sidi Krer for Petrochemicals, and a stake in Eastern Tobacco.
o Privatizing new and highly attractive sectors, such as petrochemicals, is another important milestone. Other major sectors will follow. The outright sale of the Bank of Alexandria and the floatation of a large minority holding in Telecom Egypt are underway.
o Public sector stakes in three banks realized LE 800 million, accelerating the withdrawal from the banking industry. Two similar transactions are underway. The Bank of Alexandria, which is one of the big-four publicly-held banks, is being privatized. An international investment bank has been selected to advise the government on this transaction which undoubtedly will set a milestone in the history of the privatization program.
The Bank of Alexandria
Bank of Alexandria is the fourth largest state owned bank in Egypt ranking behind; Ahly (National), Misr, and Banque de Caire. As of June 30, 2004, the bank's total assets were LE 37.5 billion and the bank's market share was 6.2% (total deposits) and 5.6% (outstanding loans and credit facilities).
During the first quarter of 2005, the Government of Egypt announced its plan to fully privatize the Bank of Alexandria during fiscal year 2005/2006. The plan was well received by economists and the investment community. This will be the first privatization in the banking sector since the start of the asset management program in1992.
On April 18, 2005, an announcement was placed in the press, locally and internationally, inviting International Investment Banks with experience of evaluation, valuation and promotion of banks to submit their technical and financial bids to assist the Government of Egypt and act as the sell-side advisor to
- Conduct an overall analysis of the Egyptian banking sector.
- Complete a diagnostic review of the Bank of Alexandria’s current performance and prospects for growth.
- Value the Bank of Alexandria on its earning capacity and market comparables.
- Advise on the most suitable privatization strategy.
- Prepare the sales documents, i.e., information memorandum and/or prospectus.
- Undertake a road-show to ensure the proper promotion for the bank and appropriate pricing for the transaction.
- Manage the sale process until the closure of the deal.
Accordingly, a joint committee comprising representatives of the Ministry of Investment, the Central Bank of Egypt (CBE), and the Bank of Alexandria, chaired by the Deputy Governor of the CBE, was set up. Its purpose was to establish the criteria for the review and evaluation of the proposals received from International Investment bankers on the required scope of work.
- On May 12, 2005, the committee started its duties with the review of eight proposals from various international investment bankers, and during the final week of May Deutche Bank, JP Morgan, and Citigroup were short-listed to make a presentation during the first week of June.
- Citigroup was selected during the first week of July.
- The assignment is expected to last between six 6 to12 months until the closure of the deal, depending on the selling strategy that will be agreed between Citigroup and the Government of Egypt.
Telecom Egypt
During the last quarter of 2004, the Government of Egypt announced its plan to sell a minority stake in TE as part of the Asset Management program for the year 2005/2006.Telecom Egypt (TE), Egypt’s incumbent telecommunications operator, was incorporated in 1998 to replace the former Arab Republic of Egypt National Telecommunication Organization (ARENTO). As of April, 2005, TE served more than 10 million fixed line subscribers, which makes it the largest fixed line provider in the Arab World and the Middle East.
- The Ministry of Investment and the Ministry of Communication and Information Technology extended invitations to local and international investment bankers to exchange views on the most suitable privatization strategy.
- TE is the sole landline provider.
- According to Laws 19 of 1998 and 10 of 2003, the majority of TE will have to remain with the Government of Egypt.
- A series of presentations were made between January 9 and April 7, 2005 by local and international investment bankers recommending an initial public offering (IPO) as the best strategy.
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On April 28, 2005, the Ministry of Communication and Information Technology (MCIT) announced through the media the government’s interest in contracting investment banks specializing in telecommunications privatizations and public offerings to submit technical and financial proposals to MCIT no later than May 29, 2005 in order to act as the global coordinators and lead managers for TE’s forthcoming share offering.
- On May 3, 2005 a committee comprising representatives from MCIT, the Ministry of Investment and Telecom Egypt was formed to set the criteria and evaluate the technical and financial proposals received.
- On May 15, 2005 a question and answer session was held at MCIT to reply to inquiries from the potential bidders on the announcement and the RFP.
- On May 22, 2005 a formal answer was provided to all investment bankers.
- On May 29, 2005 proposals were received from eight international investment bankers and two local ones.
- On May 30, 2005, the committee started reviewed the 10 proposals from various international investment bankers.
- On July 20, 2005 after an extensive review, CSFB was ranked first technically and financially. CSFB was selected to lead a consortium which includes EFG Hermes as joint global coordinator and joint book runner and CIB as the local advisor.
- The stake to be offered will be decided by the Egyptian Cabinet, probably between November 2005 and January 2006.