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Al-Ahram Weekly 24 Feb. - 1 March 2000 Issue No. 470 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 24 Feb. - 1 March 2000 Issue No. 470
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Features Focus Heritage Profile Travel Living Sports People Time Out Chronicles Cartoons Letters Cementing a trend
By Sherine Abdel-Razek
"The majority stake in almost all the old state-owned cement companies, with the exception of National Cement, are now in private hands," said Fikri Abdel-Nabie, head of Egyptian Cement Company (ECC), the first private sector cement company to be established since the wave of nationalisation in the late fifties. It is a situation that would have been unimaginable only a year ago.
In early 1999 cement was still seen as a strategic sector, a view that ensured cement companies would remain in state hands.
The five cement companies currently listed, now account for almost 10 per cent of overall stock market capitalisation, yet when privatisation was first mooted opponents argued that it would dangerously destabilise the market, and at the same time negatively impact other sectors, including construction and banking.
Such predictions proved wrong, and investors are now clamouring for an even bigger slice of the cake, pressing the government to divest yet more of its "crown jewels". And if the cement experience is anything to go by, the investors arguments may well seem irresistible.
Before privatisation the large cement companies were in desperate need of an injection of technical expertise and upgrading and the ability to provide these things was the decisive factor in assessing bids made by foreign anchor investors, said Amr El-Alfi, senior analyst with leading brokerage Prime Securities. By the second half of 1999, three multinationals had pumped around LE2 billion into local cement companies.
First to enter the arena was Lafarge. In July last year the French company acquired a 76 per cent stake in Beni Suef Cement, which this month it increased to 95 per cent. Lafarge was soon followed by Cemex, a Mexican company, which acquired a 90 per cent share of Assiut Cement, and by the British-based Blue Circle, which entered the equation when it acquired a 75 per cent holding in Alexandria Cement last November.
So what lies behind this strong foreign interest? Certainly low production costs -- cheap labour and raw materials -- play their part. So too does the relatively low cost of meeting environmental regulations in Egypt, as opposed to Europe. Buoyant demand in the local market, which is expected to grow by ten per cent this year, fuelled by the government's ambitious mega-projects, is also important.
By the beginning of this year the government retreat from a domain that had once been its exclusive preserve was nearing completion. But having earmarked Torah Portland Cement, the oldest Egyptian cement company and the largest in terms of production capacity, for privatisation, alarm bells concerning foreign domination of the sector began to sound.
SOURCE: Prime Securities
In a move widely interpreted as an attempt to boost the domestic private sectors flagging performance in the face of foreign competition, the government actively pushed Suez Cement -- of which a 31 per cent stake remains in public hands -- to acquire Torah. The deal was funded by a loan from the state-owned National Bank of Egypt (NBE).
This move coincided with a government announcement that it was establishing a new holding company, Al-Ahram Cement, to comprise several semi-public cement companies. Most observers interpreted the move as an attempt to ensure that future privatisation in the cement sector -- National and Helwan Cement are both prime candidates -- would end up with majority stakes in Egyptian hands. The move did little to please the markets, and, says El-Alfi, "shed doubts on government commitment to complete privatisation".
A change in the law regulating the submission of tenders during privatisation is likely to ensure that the battle for control of Amereya will be the fiercest yet in Egypt's privatisation programme. Competing bids can now be raised indefinitely until the holding company -- in the case of Amereya the Holding Company for Metallurgical Industries, which maintains a 29 per cent stake -- makes its choice.
The battle kicked off with Orascom Construction Industries and Lafarge both submitting bids. Ismail Shukri, vice-president of HC securities, Lafarge's adviser on the deal, points out that Lafarge's interest is in acquiring production bases close to the large domestic markets -- in this case Alexandria. (Beni Suef Cement, some150 kilometers south of Cairo, already gives it access to the capital's market.)
Ameriya, in addition, is a relatively new concern, and therefore will require less intensive modernisation. Fierce competition between Lafarge and OCI pushed their offers from LE 66 per share in late January to LE 90 by the second week of February. It was then that Al-Ahram Cement made its debut in the market, offering LE 91 per share for a 60 per cent stake.
The Holding Company for Metallurgical Industries agreed to sell five million shares -- out of the 5.8 million it holds -- to Al-Ahram, though approval of the deal was withdrawn after less than 24 hours when Benroad, a joint venture between the Portuguese company Cimpor and Egyptian Cement Company (ECC) -- a 54 per cent owned subsidiary of OCI -- entered the increasingly fierce bidding war.
Benroad submitted a LE 95 per share bid to acquire 51 per cent of the company. Lafarge responded by raising its own offer to LE100, a watershed figure it seems, since following the Lafarge offer OCI announced its withdrawal from the competition, and ECC terminated its joint-venture with Cimpor.
"The LE 95 bid, which gives a more than fair evaluation of the company, is as far as we are willing to go," said OCI's Abdel-Nabie. He revealed that OCI will now focus on channelling investments to increase ECC's production capacity from the current 3.2 million tonnes to 6.5-7 million tonnes by the year 2003.
But the withdrawal of ECC did not diminish Cimpor's determination to gain a foothold in the Egyptian market. The Portuguese company continued bidding on a stand-alone basis, offering LE 102 per share for a 51 per cent stake.
A week after Cimpor's announcement no counter offer has yet been submitted.
Market analysts, though, are almost unanimous in the opinion that Ameriya is now seriously over-valued, and predict that it will follow the path of Torah, whose share values have slumped from LE85 when the deal was concluded, to less than LE 60 last week. The feeding frenzy that hostile take-over bids generate overheat share prices and lead, almost inevitably, to a slump, seems to be the lesson of the moment.
Shukri, though, sounds an alternative opinion. From the vantage point of companies like Lafarge-Titan and Cimpor, which want to consolidate their presence in the market, the shares need not, necessarily, appear overvalued. "In acquisition deals, anchor investors buy majority stakes at prices which include a controlling premium... they buy shares at a higher value than their actual prices, since they seek a controlling majority."
