Privatization announcement premature, deals held up by negotiations navigating investors’ concerns over foreign exchange value

Five months after launching its public sector privatization program, the Cabinet celebrated last week the completion of deals worth US$1.9 billion thus far.

But a number of sources close to the deals told Mada Masr that the fanfare was premature.

Talks are still ongoing to close some of the deals, said political and financial sources. Parties to the negotiations, they said, are navigating a careful course; the state is in dire need of foreign currency inflows from the asset sales while buyers seek reassurances to offset uncertainty around the exchange value of the Egyptian pound.

Added to the two company stake sales already announced in recent months, Prime Minister Mostafa Madbuly informed the public on July 11 of a new package of deals bringing the state’s total profit from asset sales up to a value of $1.9 billion.

Of the nearly $2 billion, said Planning Minister Hala al-Saeed, $1.65 billion is to be received in US dollars and the remaining $250 million worth is in Egyptian pounds.

Chemicals firms for the Emirates

For $800 million, the government is parting with stakes representing 25–30 percent of shares in three oil industry firms — the Egyptian Drilling Company, Egyptian Linear Alkyl Benzene (ELAB) and the Egyptian Ethylene and Derivatives Company (ETHYDCO) — to the Emirati-state-owned Abu Dhabi Development Holding Company. Madbuly announced the new deal in a televised press conference last Tuesday.

But sources close to the deals told Mada Masr that the Sovereign Wealth Fund’s pre-offering subsidiary, which is managing the deal, has not yet signed any contracts with the Emirati fund, meaning that the deal is not yet final. 

Hotels for the Talaat Mostafa Group and a foreign partner

For $700 million, a consortium including a foreign partner and ICON, a hospitality subsidiary of real estate giant Talaat Mostafa Group, has bought into seven of the state-owned hotels under the Holding Company for Tourism and Hotels. The deal raised the holding company’s total capital by 37 percent.

The deals represent an “influential stake” in and management rights to hotels in Cairo, Alexandria, Luxor and Aswan, including Sofitel’s Legend Old Cataract in Aswan and Winter Palace Hotel in Luxor, and the Steigenberger in Tahrir Square, said an Egyptian Exchange statement announcing the purchase on Wednesday.

The deal was a last-minute change of direction, said the informed sources speaking to Mada Masr on condition of anonymity, explaining that a $750 million agreement for the same package had previously been reached with the Qatar Investment Authority. But the government changed course just days before Madbuly’s Tuesday announcement, they said, deciding instead that the hotels would go to the conglomerate headed by former Senator and real estate magnate Hesham Talaat Mostafa for $50 million less.

State sells steel firm shares to Ezz Steel

And for $241 million, the state sold its entire 31 percent stake in Ezz El Dekheila Steel. It received 60 percent of the proceeds in foreign currency, while the remainder was paid in Egyptian pounds, the prime minister said. The shares will return to Ezz El Dekheila Steel’s parent company, Ezz Steel.

According to sources close to the steel deal, the state bodies that held shares in the company — including the National Investment Bank, the National Bank of Egypt and a number of state insurance and oil firms — will take over a month to completely exit the company. After the company announced it would voluntarily delist all of its shares from the Egyptian Exchange, it must hold a general assembly meeting in which at least 75 percent of Ezz El Dekheila’s shareholders vote in favor of the delisting in order to complete the deal. At least a month of proceedings would follow the approval, the sources said.

Privatization at what cost?

If completed at the values stated in the government’s televised Tuesday presser, the state has come in just short of the $2 billion target it said it would net from the first phase of asset sales. Earlier deals saw a 10 percent stake in Telecom Egypt sold for nearly $128 million, and an 81 percent stake in the National Paint Industry Company (Pachin) sold for around $25 million.

While the new deals tick off five of the 32 companies the government announced in its program launch in February, the remainder, including larger and more lucrative sales, have remained as complex to pull out of the bag as predicted.

Several sources with knowledge of the latest deals broke down some of the factors that facilitated progress toward completion, but that may be hard to replicate in other company sales.

An MP in a party close to the government told Mada Masr on condition of anonymity that the small and fragmented deals help hedge against the impact of the exchange rate on the final price, adding that this may also explain why larger deals such as Vodafone have been delayed. The MP said that the planning minister told a group of MPs in April that bigger deals are more likely to take place in the third quarter of 2023, between August and October.

The MP and another two sources speaking anonymously said that investors were sold on the deals for the petrochemicals and hotels companies given that these firms earn part of their revenues in US dollars.

The downside, said an investment official at a US financial consulting firm linked to the deals on condition of anonymity, is that “ceding companies or shares in companies with foreign currency revenues means that the state no longer has these sources in the long term, even if it obtains foreign currency in return in the short term.”

“Based on my communication with a number of government officials in the ministries, the issue is starting to strike them — as in, there is some concern among them about the impact of getting rid of companies with dollar resources,” they said.

The deals may also have been concluded on the basis of a lower valuation of the Egyptian pound, said Callee Davis, economic analyst at consultancy firm Oxford Economics, and Hassanein Malik, director of equity research at Telemar Research. Davis said that given projections that another devaluation will be inevitable, it is unlikely that investors would have agreed to the deals without this kind of guarantee.

Egypt has embarked upon the privatization program as the government struggles to secure hard currency, with a financing gap estimated to stand at $17 billion during the two-year duration of an IMF loan program sealed at the end of last year. The program hinges largely on the government divesting from assets in order to level the playing field for private sector actors to play a larger role in the economy, in conjunction with allowing the value of the pound to drop as it moves toward being determined by supply and demand.

Given slow progress in both of these hallmarks in the IMF program, Egypt’s first periodic review with the global financing body has been delayed since March.