Sherine Abdel-Razek examines the overt and covert reasons behind the cancelled sale of Banque du Caire Lower bids than expected was the reason behind cancelling the auction sale of Banque du Caire (BC) on 25 June. BC Chairman Mohamed Barakat told reporters at a news conference later that day that the offers of the three banks interested in buying up to 67 per cent of BC were below value. While the low bids were attributed to both external and internal economics, the decision to cancel the sale altogether was seen as a political move to end controversy over the third largest public bank sell out. The sale was called off after bidders were asked during the auction to increase their original bids of $1.9 billion by National Bank of Greece (NBG), $1.3 by the UAE-based Mashreq Bank, and $1.2 billion by a consortium of Arab banks. While two banks declined to raise their offers, NBG rose to $2.09 billion, but that was still too low. None of the bank officials would reveal the projected price set by the committee. BC is the third largest Egyptian bank, with six per cent of overall deposit and a network of 215 branches. NBG's failed bid implies a price to book value (PBV) ratio of 3.6 times and 28 per cent value to deposits. These multiples are significantly lower than the ones achieved in the sale of Bank of Alexandria (BA) and that of Al-Watany Bank (WB), the two largest recent banking transactions in Egypt. In October 2006, BA sold at ratios of 6.1 times and 42 per cent value to deposits; WB sold in August 2007, at 4.9 times PBV and 60 per cent value to deposits. "The timing could not have been worse," argued Ahmed Kora, a banking expert and former chairman of WB. "International markets are muddling through the aftermath of the sub-prime crisis, skyrocketing inflation and a weakening dollar all affect the cash available to financial institutions worldwide." On the domestic front, the picture is just as gloomy, continued Kora. He explained that the negative report released by Moody's rating agency on the Egyptian economy a few days before the auction, as well as the freezing of the Canadian E Agrium petrochemical project in Damietta, send negative signals to investors abroad. While agreeing with Kora's analysis, a banker at a recently privatised local bank gave even more reasons. The source, who asked not to be named, pointed out that the abrupt decision on 23 June to set a 24-hour deadline for the submission of bids and the absence of any ministers and the CBE governor at Barakat's news conference, strengthens speculation that the government's agenda was to abandon the controversial sale of the bank altogether. "The government wants to calm social unrest in the aftermath of recent price hikes, gas exports to Israel and a controversial anti-trust law," he asserted. "It doesn't want to risk more public uproar by short selling the bank or carrying out the sale altogether." Analysts also believe that the bank's portfolio has undermined its value. EFG-Hermes's commentary on the decision noted that despite the government having transferred most of BC's non-performing loans to Banque Misr, it might require further restructuring and investments to upgrade the bank's operations, and strengthen its capital position to bring it in line with private sector banks. Kora contended that the vagueness of the financial position of the bank is itself a turn off. "They say the bank has LE1 billion in profits in 2007, but where are the financial statements to show the breakdown of these profits, if true?" he asked. When offering an entity for sale, the financial statements must be reviewed and approved by an external auditor for at least two years, added Kora. Moreover, limiting the offered stake to a maximum stake of 67 per cent is not in itself appealing to many banks, since this would fragment the decision-making process. Most analysts agree that the best case scenario to follow now is to float the minority stake of the bank through an IPO, provided that the bank gets a new professional management. After the auction was cancelled, Barakat told reporters that a former plan to offer 28 per cent of the bank in an IPO on the Egyptian Stock Exchange will be revived. Kora believes WB is a good model for BC to follow, since his former bank made a huge recovery in a short time before being sold. In 2002, WB's share price was LE7 when a new management took the lead; a restructuring process boosted the bank's financials and made the shares appealing enough to be snatched in its IPO at LE37. In 2006, the bank was sold at LE77 per share. "You need a professional team to make your commodity attractive enough to secure a good price," he explained.
