Hisham Hasabo* is perplexed by the manner in which the EAB was sold The Bank of Alexandria, in partnership with the American Express Bank, once held nearly 75 per cent of the equity in the Egyptian American Bank (EAB). EAB was created in the mid-1970s, and initially 51 per cent was owned by the Bank of Alexandria and 49 per cent by the American Express Bank. The agreement between the Bank of Alexandria and the American Express Bank gave the latter complete operational control of EAB, an arrangement that saw EAB go from success to success. In the mid-1990s the Bank of Alexandria, acting on Ministry of Economy instructions, sold 25 per cent of EAB, though the administrative arrangement remained mostly unchanged. The Bank of Alexandria retained five seats on the board of EAB, the American Express Bank four, while buyers from the private sector were given two seats on a board that expanded to 11 members. As Egypt pressed on with its privatisation policies, international players began buying into the Egyptian banking sector, establishing a number of joint venture banks. Banque Misr sold its stake in Misr International Bank (MIB) to Société Générale, while other banks offered to buy Bank of Alexandria's equity holding in EAB. The interest in buying into EAB was enormous, not least because of its 80- 100 per cent rate of annual return. EAB has 27 branches and an impressively qualified staff. Given that foreign banks with no presence in Egypt can only enter the market by buying into existing banks -- the Central Bank of Egypt has issued no new bank licences for 15 years now -- EAB became a tempting prize. Following the Bank of Alexandria's announcement in early 2005 that the government was seeking to privatise part of its capital, three international banks made offers to buy its equity in EAB, which has now been sold to the French Calyon Bank at LE45 per share. On top of this Calyon agreed to pay LE5 per share towards a severance payment fund. Calyon is a reputable international bank that has been operating in the Egyptian capital market, albeit on a small scale, for two years now. The sale provoked a heated debate, not least because the selling price was lower than the stock market price of LE57.50 per share. The Calyon deal appears to have undermined the interests of shareholders, including the Bank of Alexandria and the American Express Bank. If the aim of the privatisation programme is to boost investment and bring in strategic investors, in the case of EAB a strategic and successful investor was already in place. And selling the bank has resulted in no addition to investment since assets simply changed hands. The sale may have provided the Bank of Alexandria with extra cash but it has deprived it of one of its most- prized assets and the sale has not boosted the value of the soon-to-be- privatised Bank of Alexandria. Some may wonder why the American Express Bank sold its EAB holdings. The answer is simple. American Express Bank's holding in EAB was smaller than the Bank of Alexandria's and once the latter sold its shares American Express Bank would have found itself in a weak position vis-à-vis the new buyer. The deal gives Calyon a foothold in Egypt's retail banking market, an advantage that was not reflected in the sale price which, at LE45, was LE12 less than the market price. Many have argued that it would have been better to increase EAB's capital and then make a public offering, a move that would have pleased investors as well as the stock market. The Calyon deal, we are told, followed due diligence reports by reputable international consultants. What the international consultants did, though, was to base their assessments on the book, rather than stock market, value of shares. It is perfectly possible to argue that the EAB shares should have been sold to the public, perhaps in smaller quantities and in a more gradual way, a procedure that would have enabled Egyptian investors to buy into the bank. * The writer is head of the Accounting Department at the Faculty of Commerce, Ain Shams University.
