Egypt 2015: Back in business
Egypt’s capital markets are firmly back on the radar of international investors, thanks to a pair of high-profile IPOs and the promise of the first sovereign bond for more than five years.
AS WITH MUCH else in the country, deal flow in Egypt more or less came to a standstill during the three years after the 2011 revolution. Investors fled equity markets, dealmakers held their hands and plummeting ratings kept the country locked out of international bond markets.
In the past year, however, Egypt’s capital markets have sprung back to life. Its stock market was one of the top five performers worldwide in 2014. The benchmark EGX 30 index was up more than 30% on the year and rose by a further 10% in January, to levels not seen since 2008. It has since had a slightly bumpier ride but in late April was still well above 8,500, more than double the level three years earlier.
The primary equity market is also showing strong signs of revival. In May 2014, Arabian Cement became the first company to launch a major flotation on the Egyptian Exchange for four years when it priced a $108.8 million initial public offering (IPO).
It was followed in March this year by Orascom Construction, the newly demerged engineering and construction business of Netherlands-listed OCI, which launched a $185 million dual listing on the Egyptian Exchange and Nasdaq Dubai.
The engineering and construction firm, which is controlled by Egypt’s Sawiris family, had previously been the largest listed stock on the Cairo bourse but its shares were moved to Amsterdam in 2013 as the political and economic environment in Egypt deteriorated. Its return to the Egyptian Exchange was therefore seen as a vote of confidence in the new regime of President Abdel Fattah al-Sisi.
The IPO that attracted most international attention, however, was that of Egyptian food and beverage firm Edita. With annual revenues of around E£2 billion ($262 million), the Cairo-based company is the largest independent snack producer in North Africa and exports to more than 15 countries in the Middle East, Africa and Asia. It is also one of the few Egyptian firms to have thrived in the aftermath of the Arab Spring, notching up double-digit growth in each of the past four years.
The listing comprised retail and institutional offerings, both of which proved hugely popular with investors. Institutional investors placed more than E£22 billion of orders for 92.5 million shares, giving an oversubscription level of 13.4 times. The retail tranche was 4.5 times oversubscribed, with orders totalling E£1.4 billion.
International investors were well-represented in the deal, with around 70% of the institutional shares being placed in London in the form of global depository receipts (GDRs). In total, the flotation – of 30% of Edita’s total share capital – raised E£2 billion, putting the company’s market capitalization at E£6.7 billion.
The success of the transaction is widely expected to encourage other Egyptian privately owned companies that have been considering an IPO, such as leading mobile operator Etisalat, to come to market in the coming months.
Public sector promise
Equity investors may also have a chance to buy shares in state-sector firms this year, if ministers deliver on promises to restart Egypt’s long-delayed privatization programme. There have been no new public offerings of state-owned assets in Cairo since 2005, but in the past two months it has been reported that at least five public sector companies are preparing to list.
Misr Oil Processing and Fertilizers Company (Mopco), a major producer of urea, looks set to be the first to market after applying to the Egyptian Exchange for a listing at the end of March. The state-owned company, which has a share capital of E£2.3 billion, has been reported for several years to be planning an IPO and its chairman Hassan Abd El-Alim confirmed in September that the flotation would finally take place this year.
Announcing the listing request, the Egyptian Exchange noted that it “reflects the public sector intention to take advantage of the funding opportunities offered by EGX as part of its efforts, along with many other governmental institutions, to list more state-owned companies”.
Three of the other privatization candidates are from the petrochemical sector. The Middle East Oil Refining Company (Midor), an Alexandria-based refinery with a share capital of $1.1 billion, is reported to be aiming to raise $400 million in an IPO in the fourth quarter of this year. The Egyptian Company for Refrigeration (Gas Cool) and El-Neel Oil Marketing Company are also preparing to float, according to the Egyptian Exchange.
Meanwhile, Egypt’s Supplies Minister Khaled Hanafi indicated in February that the ministry was exploring the options with regard to a listing of the Food Industries Holding Company (FIHC). An IPO, which would be the first ever of a government-owned holding company in Egypt, could raise E£3billion-4 billion to support underperforming companies in FIHC’s 43-strong portfolio.
Egypt's stock exchange in Cairo
Even more eagerly awaited than primary equity supply, however, has been the return of the Egyptian sovereign to the international bond market. Egypt’s last eurobond outing was in April 2010, when the Ministry of Finance sold a hugely successful $1.5 billion triple-tranche deal that attracted more than $13 billion of orders and included a ground-breaking 30-year note.
The revolution of January 2011 and the political turmoil of the next three years, however, effectively closed the eurobond markets to Egyptian borrowers. Sovereign CDS spreads soared, from 240 basis points at the start of 2011 to a high of 896bp in July 2013 at the time of the Egyptian army’s intervention to oust elected president and Muslim Brotherhood leader Mohamed Morsi.
Over the same period, international credit rating agencies steadily downgraded Egypt from high double-B status to low single-B levels – and even, in the case of Moody’s, triple-C.
In the nearly two years since Morsi’s removal, however, both metrics have shown significant improvement. Egypt’s CDS spread has fallen steadily to as low as 275bp in November last year and has now stabilized in the region of 310-320bp. Meanwhile, Fitch Ratings upgraded the sovereign by one notch to B in December and Moody’s followed suit at the start of April, restoring the borrower’s B3 rating.
Combined with the ultra-low global yield environment, this has created the ideal conditions for a return to the bond market by Egypt, and in March the Ministry of Finance placed an advertisement in the Financial Times asking banks to pitch for a eurobond mandate. Bookrunners were subsequently appointed at the end of the month.
Ministers have indicated that the initial offering, comprising a $1.5 billion 10-year bond and potentially also a $500 million 30-year note, will be made to investors before the end of June. A second deal could follow later in the year.
The bond issue will not only give the Egyptian government access once again to a deep pool of funding but will also establish a benchmark in the international markets that can be used as reference point by other borrowers from the country.
Indeed, National Bank of Egypt has already announced plans to follow the sovereign into the market. The state-owned lender was the last Egyptian name to access the eurobond market before the revolution, when it priced a $600 million five-year debut deal in July 2010.
Meanwhile, back at home, the Central Bank of Egypt (CBE) has enlisted the help of the European Bank for Reconstruction and Development (EBRD) in developing a secondary market in local currency government debt. Traditionally, the vast majority of domestic government bonds have been bought and held by Egypt’s banks, which has severely limited the opportunities for secondary trading.
The CBE is working with the EBRD to develop a state-of-the-art clearing, settlement and depository system for government securities to facilitate secondary trading with a view to establishing a local yield curve. This in turn, it is hoped, will encourage the development of a domestic corporate bond market by again providing a reference for potential issuers.
The debt and equity capital markets are not the only areas that have seen a pick-up in transaction volume in recent months. M&A activity has also started to show signs of revival, particularly in the food and beverage sector.
In January, Kellogg announced that it had won the bidding for 85.9% of Bisco Misr, Egypt’s leading producer of biscuits and cakes. The US firm fended off rivals including private equity firm Abraaj with an offer of E£89.86 per share, valuing the company at E£1 billion.
Bidding was similarly brisk for Arab Dairy Product Company. Egyptian private equity firm Pioneer Holdings and the UK’s Arla Foods both made offers for a 51% stake in the company, which was subsequently sold in January to processed cheese maker Al-Nour, the local subsidiary of French dairy giant Lactalis.
Interest in the F&B sector is expected to remain intense, given the exposure it offers to Egypt’s young and rapidly growing population, but deal activity in other industries – including petrochemicals and agriculture – is also expected to return as investors become convinced of the sustainability of the country’s economic revival.