Pharos Investment Banking plans to begin the new year with the finalisation of three acquisition deals, with a cumulative value is estimated at EGP 900m.
Two of the three acquisitions will be of companies in the industrial sector, with the first exceeding EGP 100m, while the second is estimated to close at EGP 300m. The third acquisition will be of a company in the pharmaceutical sector and valued at over EGP 500m.
Daily News Egypt spoke with the head of Investment Banking at Pharos Holding, Sherif Abdel Aal, to learn more about the company’s current and long term plans, which include the management of nine acquisitions and two IPOs in the health and services sectors in the Egyptian Exchange.
Pharos Investment Banking has seen a major shift in the volume of activity this year, especially after the acquisitions of companies in the food and pharmaceutical sectors in the past three months. What are the reasons behind this shift?
There are several reasons behind the surge in the volume of business. There are factors related to market conditions. In the period between the revolution of January 2011 and 2013, the Egyptian market saw a lull, as investors who were willing to sell believed companies’ ratings were low.
The parties interested in acquiring new companies, especially from outside Egypt, believed that the investment climate was blurry, which has negatively impacted the activity of investment banks over three consecutive years.
However, in 2014, investment conditions and economic growth rates improved.
Another reason for our business growth is structuring our activity. We built a team of 10 experts who have good connections with major companies, as well as local and foreign investors and financial institutions. We also drafted an expansion plan.
All of this coincided with the restructuring of Pharos ownership. Qalaa Holdings exited and Al-Taymour acquired over 80% of the company compared to the 20% owned by El-Raghy. Shareholders supported the restructuring activity and encouraged building a new team.
Can you tell us about the deals that Pharos is managing now?
Pharos is currently the financial adviser to selling parties in nine acquisition deals. We are working to attract strategic investors and investments funds from abroad, especially Europe and the Gulf, for their interest in investment in the Egyptian market.
These companies work in different sectors. There are five food companies, including snacks, chips, cheese, and ice cream companies. The least of these deals is valued at EGP 100m. One of the deals is worth EGP 300m. But the largest transaction will exceed EGP 1bn.
Two deals will be finalised in January. The first deal exceeds EGP 100m and the other is about EGP 300m.
Pharos was commissioned to find investors to acquire a pharmaceutical company whose estimated value exceeds EGP 500m. This deal is expected to be finalised with European investors in January 2016. There are other negotiations for another pharmaceutical transaction that may be finalised by mid-year. The deal is expected to exceed EGP 1bn.
The company is managing two deals in the retail sector. The value of the first deal is about EGP 1bn, and the second will be a multi-billion pounds deal. Both are expected to be finalised in the middle of 2016.
Does Pharos operate as financial adviser alone, or in coordination with other financial advisers?
Pharos exclusively manages deals to bring appropriate financial investors to selling parties. Coordinating with other advisers results in contradictions between offers, which eventually harms the client.
Pharos is involved in managing the securitisation of the loans portfolio for Tanmeyah Micro Enterprise Services. What is the value of the portfolio and the date of proposition?
We have not specified the final value as yet, but we could say it will be a few hundred million pounds. The securitisation bonds will be put forward in the first quarter of next year.
The Chairman of Tanmeyah Amr Abouesh said in March 2015 that the value proposition approaches EGP 200m. However, two months later, he said the final value is yet to be specified.
It is known that securitisation is based on the conversion of premiums of loans or real estate, or any type of finance, to bonds. The credit rating of these bonds determines the interest on them. This process aims to secure liquidity for companies.
This is the first time that Pharos has managed a securitisation process, while other companies, such as Contact, have more experience. How would you explain that?
Promoting securitisation bonds is part of investment banking. The process is also conducted in coordination with the Commercial International Bank and the Arab African Bank.
Moreover, it would have been hard for Tanmeyah to commission another competitor financing company, such as Contact, that specialises in car loans, as they would then have access to the information of the portfolio and could then engage in the same activity.
This transaction could be a step for Pharos to obtain more securitisation transactions.
Pharos has not managed any propositions since propositions in the stock exchange were restored in 2014. Is the company managing any propositions now?
Pharos is preparing to promote two initial propositions in the stock market in 2016, in the fields of health and services.
Nevertheless, we cannot overlook that the Egyptian Exchange was not ready for an influx in propositions, especially in the past few months, due to poor liquidity.
But how would you explain the return of many propositions in 2014, such as Arabian Cement, Orascom Constructions, Edita Food Industries, and Emaar Misr?
The Egyptian stock market has not seen real value propositions during the period from the end of 2010 until early 2014. It was natural that the exchange wants to move away from the stagnancy to put up new companies. However, the market, now, is in a period of anticipation, with the new parliament being formed and the Central Bank’s pending monetary policies under the new chairmanship.
You said the investment climate in Egypt is beginning to improve. How can this have happened when investors have been facing difficulty in securing dollars to operate and in transferring their profits abroad?
What I meant to indicate by saying the climate was not favourable before 2014 was that investors were faced with many security problems and an increasing cost of risk. Now, it is very different.
Although the dollar shortage has been affecting business, it is only temporary. Egypt has seen this several times before. Hence, the problem should be only considered in the short-term, and strategies for acquisitions matter on medium and long terms.
In addition, foreigners have priority access to foreign currency resources as long as they inject investments in foreign currencies.
The evidence of that is the improved investment appetite of foreign companies. The US company Kellogg’s acquired 88% of BiscoMisr for EGP 888m. It then acquired all shares of Mass Food Group for EGP 400m.
Does the low price of the pound against the dollar give a comparative advantage for foreign investors by reducing the value of acquisitions carried out in pounds?
Yes, of course. Evaluations conducted in pounds fell, after the depreciation of the pound. This compensates foreign investors for the risk of dollar shortages or possible appreciation of the pound in the future, as the value of profits decline when transferred abroad in dollars.
Pharos relies on a very important aspect for promoting investment in Egypt. When attracting a strategic investor who focuses on certain industries, they bring more investors, such as direct investment companies, to acquire local companies. Foreign investors often consider long-term growth rates.
Growth rates in the European and American markets are very low, at 1% to 3%, so emerging economies are becoming more attractive for investments.
North African markets are the most attractive investment markets among emerging economies. When looking at those markets, Egypt stands out as most prepared and attractive market, especially the food and pharmaceutical sector. Egypt has a comparative advantage in this sense when held against other regional burgeoning markets, such Tunisia that has recently begun to attract investments, and Morocco that is considered a good but small market.
Some investment banks said deals fail due to problems in transferring funds abroad in foreign currency. Did Pharos face similar issues this year?
No, the problems we faced were not fatal. Some deals were hindered because of the dollar price, as it affects companies’ ratings. However, both parties usually came to an understanding and deals were finalised eventually.
But this means that deals now take longer, sometimes up to 14 months, when they used to take six months.
Why are most transactions in the food and pharmaceutical sectors, away from other sectors that can bring added value to the economy, such as heavy industries and information technology?
The information technology sector is relatively small. And heavy industries, such as cement and fertilisers, see very few acquisitions as their financial growth was at its peak 10 years ago, before most companies were acquired by international strategic bodies.
Besides, we cannot overlook governmental decisions that negatively impacted acquisition transactions in these sectors, such as coal that requires huge infrastructure investment, and the increasing price of supplying factories with natural gas.
Aside from the dollar shortage, what are the other obstacles facing investors now?
Investors still face the usual obstacles when dealing with licences and permits for establishing new companies and projects. This is why it is easier to acquire existing companies.
The amendments to the investment law and the modifications to the one-stop shop system, which have consolidated obtainment of all permits and licences to one place, the General Authority for Investment and Free Zones (GAFI), are still very vague to us and to investors. We still need further experiments to judge their efficiency.
How do you view the growth rates of the Egyptian economy during the fiscal year 2015/2016?
There is strong growth that is difficult to monitor by looking at the numbers. It is not limited to the official rates ranging between 5% and 5.5%; there is a very strong parallel economy that accounts for 60% of the Egyptian economy’s strength, according to estimates.
The impact of the parallel economy was revealed after the 25 January Revolution, where Egypt has achieved slow growth despite the recession in most official economic activities.