Foreign companies are readying themselves for the sale of the state tobacco monopoly, reports Sherine Abdel-Razek Eastern Tobacco Company (ETC), the state tobacco monopoly widely regarded as being among the government's crown jewels, is rumoured to be up for sale. The Holding Company for Chemical Industries' (HCCI) denial last week that it is planning to sell its 52 per cent stake in ETC failed to dampen the speculation as ETC's shares reached LE283, an all time high. Rumours have been circulating for some time that several international tobacco companies, including British American Tobacco and Philip Morris, are undertaking due diligence studies in preparation for a bid, with many market observers arguing that international cigarette manufacturers would not embark on the due diligence exercise unless they anticipate that a deal will go through. If it does happen it will be the fourth time a stake in ETC has been up for grabs. In 1995 HCCI floated 20 per cent of ETC and then followed up the initial sale with the flotation of a further 13 per cent in March 1997. Even more recently, in July, 14 per cent of ETC were listed on the Dubai Stock Exchange, increasing the company's free float to 41.67 per cent. ETC's employee shareholder association owns five per cent of the company with a further three per cent owned by public insurance companies and banks. The government has long viewed ETC as a cash cow. In 2003/2004 budget tobacco revenues contributed LE4.1 billion to the state's coffers. ETC's monopoly on the production and distribution of cigarettes and tobacco products in Egypt is likely to appeal to investors. In addition to producing its own brands, ETC also manufactures international brands on behalf of the world's two largest tobacco companies, Philip Morris and British American Tobacco. ETC products dominate the local market, with a 90 per cent share of total sales. The company's financial performance is good, and is expected to improve. HC Securities predicts the company will post profits of LE384.1 million during fiscal year 2005, a 25.2 per cent increase over the previous year's LE306.8 million. HC based its predictions on the positive impact of the appreciation of the Egyptian pound against the dollar on ETC's raw material imports and on the company's aggressive pursuit of a more profitable product mix. The sector's high growth rates underscore the company's potential. Egypt consumes 85 billion cigarettes a year, according to Fitch Ratings, and 20 per cent of the population smokes. Egypt has the highest cigarette consumption in the Middle East and North Africa (MENA), and accounts for 25 per cent of total MENA consumption. It is a market that is expected to grow over the next decade. People over 18 years and under 65 represent the primary market for cigarette consumption -- and with 40 per cent of Egypt's population under 15 the market will grow enormously in the next 10 years. Smoking also appears to be becoming more acceptable socially, despite anti-smoking campaigns and Islamic prohibition of practices that harm the body. The company is also in a better position than in the past when it comes to pricing its products. The government loosened its grip on cigarette pricing in 1999, prior to which it had fixed prices for a decade. On the downside are concerns over ETC's expenditure. Tobacco cultivation is illegal in Egypt so the company imports all its raw tobacco from China, India and South East Asia. Raw materials account for up to 75 per cent of ETC's total production costs, a situation that has led the company to seek approval for the ban on tobacco cultivation in Egypt to be lifted. Without the ban being lifted ETC will remain vulnerable to exchange rate fluctuations. ETC also leases its machines through capital lease contracts which have a combined value of LE1.125 billion. Two of these contacts -- valued at LE184.9 million -- expire in 2004/2005. The remaining contracts, with a value of LE940.4 million, were signed in 2004 and carry interest rates ranging from 11.4 to 12 per cent. ETC's real estate assets, which are undervalued on the balance sheet, add to the company's net worth. According to the HC securities report ETC's landholdings were valued at LE219.7 million on its 9M04/05 balance sheet. "Their market value, based on estimates of real estate brokers, is in the region of LE1,557 million, translating into capital gains of LE1,510 million. Assuming these gains would be taxed at a rate of 20 per cent it would result in net available sales proceeds for shareholders of LE1,208 million. Since being formed in 1927 ETC has undergone many changes as it successfully positioned itself as the market leader. The rapid growth of the company was, though, halted when in 1963 it was nationalised.
