Going private in Egypt

The Egyptian government has decided to offer the second of the original four state-owned commercial banks for sale to a strategic investor. However, the deal may not proceed quite as smoothly as the privatisation of Bank of Alexandria, which was sold to San Paolo IMI of Italy last October for US$1.6bn (for an 80% stake) following a vigorously contested tender. Whereas Bank of Alexandria had been groomed for privatisation for several years, and had benefited from a management revamp and a clearing out of its bad debts before being offered for sale, Banque du Caire comes to market following an aborted effort to merge it into the larger Banque Misr. Prospective buyers will have to weigh the attraction of gaining access to Egypt’s rapidly growing financial services market against the drawbacks of becoming involved with an institution carrying such a lot of baggage. The deal could also face public criticism, particularly if the sale price does not match that of Bank of Alexandria.

A few days after the July 11th cabinet meeting, at which the decision to privatise Banque du Caire was taken, the government and Banque Misr issued an invitation to international investment banks to bid for the mandate to provide sell-side advisory services for the deal, with a somewhat tight deadline of August 1st. (Citigroup performed this role in the Bank of Alexandria sale.) Banque Misr is involved by virtue of it being the owner of Banque du Caire’s shares, even though the latter bank continues to operate under its own name.

Unfinished business

Banque du Caire was the first of the big four state-owned banks to receive a transfusion of private-sector management. In 2000 Ahmed Elbardai, formerly the Cairo-based regional chief of Citibank, was drafted in as chairman and managing director. Mr Elbardai brought several other executives from the private sector into the bank (many of them from Citibank), and embarked on a determined effort to clean up its balance sheet. A similar process occurred at Bank of Alexandria two years later, with Mahmoud Abdellatif, who had earlier been recruited from JP Morgan Chase by Mr Elbardai, put in charge. Mr Abdellatif and his deputy, Fatima el-Lotfi, have remained in place following the San Paolo IMI acquisition, in an apparent vote of confidence from the Italian bank. By contrast, Mr Elbardai is no longer on the Banque du Caire board, which is headed by Mohammed Barakat, who was drafted from the private sector to take charge of Banque Misr, with Mohammed Ozalp, a former general manager of Misr International Bank, serving as his deputy.

The merger with Banque Misr and the break-up of the former Banque du Caire board strongly suggested that the task of sorting out the bank’s long legacy of bad debts was far from being completed. (Among the bank’s most notorious customers was Rami Lakah, whose healthcare group in 2001 defaulted on a Eurobond underwritten by Banque du Caire.) Now it seems that Banque Misr has concluded that it does not have the wherewithal to deal with the matter itself.

Prior to its privatisation, Bank of Alexandria went through a cleansing process, whereby its bad debts, accounting for almost half of its entire loan portfolio, was assumed by the National Investment Bank and subsequently settled from the proceeds of privatising other assets (mainly the sale of a 20% stake in Telecom Egypt for E£5.1bn; US$870m). The process resulted in the bank’s total assets being whittled down to E£33bn at end-June 2006 from over £E38bn the previous year. Banque du Caire has yet to report figures for the 2005/06 financial year. As of June 30th 2005, its assets totalled E£45bn, including loans of E£21.7bn (net of loan loss provisions amounting to £E5.7bn). Some of the proceeds of the Bank of Alexandria sale have been allocated to covering the bad debts of the remaining three banks. However, it is likely that substantial additional funds would need to be advanced to put Banque du Caire in the shape that Bank of Alexandria was in when it was privatised.

Gulf buyer?

Aside from San Paolo IMI, several other European banks have entered the Egyptian market or consolidated their presence through acquiring state-banking assets over the past two or three years, mainly in the form of the public-sector stake in joint-venture banks. A number of Gulf Arab banks have also sought to enter the Egyptian market through the acquisition route—the Central Bank of Egypt is not issuing any new licences—although so far with limited success. Bahrain-based Ahli United Bank last year took control of Delta International Bank, and a number of Kuwaiti and UAE banks have been sizing up other opportunities, including Alwatany Bank of Egypt, Egyptian Gulf Bank and National Bank for Development. Dubai-based MashreqBank was also among the bidders for Bank of Alexandria. Banque du Caire, for all the doubts surrounding the quality of its balance sheet, could be a tempting target for a Gulf bank looking to widen its horizons.

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