Naeem stated, in a recent report that, it sees Orascom Construction Industries (OCI)'s (OCIC.CA) move to launch an exchange offer for its global depository receipts (GDRs) as an initiative to hasten the demerger between its construction and fertilizer arms, which currently remain stalled pending the resolution of issues over taxes and natural gas pricing in Egypt. However, looking at the various probable outcomes, a swift EFSA approval (following a possible upward revision in the price from EGP280/share) would be beneficial to Egypt from a macroeconomic perspective (through USD1-2bn of inflows to the CBE). Although the deal would mean a 6-7% drop in daily market volumes on the EGX, which would impact the brokerage/investment banking industry, we view this as a short-term phenomenon that would ultimately be offset by rebalancing of portfolios into other attractive Egyptian stocks. As OCI is focused on a demerger, follow-on M&A activity seems likely if the Egyptian Financial Supervisory Authority (EFSA) gives its nod to the current transaction or if it approves the demerger locally. Probable outcomes of OCI's proposed tender offer/share exchange for 25% of shares listed in Egypt: Scenario 1 EFSA immediately approves the offer for EGP280/share, resulting in a USD1-2bn (the cash part of the tender offer) FX inflow into Egypt, bolstering depleting reserves. Much of this would be reinvested elsewhere on the EGX. The government would then deal with other contentious issues later, resulting in a likely USD3.7bn overall gain for Egypt. In our opinion, this is a reasonably likely outcome, as the prospect of USD1-2bn in FX inflows would be tempting, offering much-needed relief to the central bank's depleted FX reserves. Further, with OCI's main listing elsewhere, the government may feel emboldened to tackle the natural gas pricing issue and the question of capital gains tax (USD2bn). Directly or indirectly, this would ultimately translate to an average total gain of USD3.7bn (refer Fig. 1) to Egypt in the medium term. Scenario 2 EFSA first rejects the offer, and then approves it on the condition that the price be revised upwards, closer to EGP300/share. Egypt would then get approximately USD2bn in an immediate FX infusion. The rest of this scenario would be the same as Scenario 1. In this scenario, the EFSA may reject the deal by saying that the EGP280/share price is too low, and with the majority owners benefiting otherwise from the deal (through fees, etc), that minorities are at a disadvantage. Under this scenario, the EFSA would likely demand an independent evaluation of the company's fair value, which could take some time. Nevertheless, the maximum upside to the valuation would be c. EGP300/share, in our view, assuming best-case scenarios for the group's operations and no negative outcomes from the capital gains tax and natural gas pricing disputes. Once this process is completed, the outcome is essentially the same as Scenario 1 above, except that the likelihood of investors opting for cash (rather than a share exchange) would be higher. We believe this scenario is the most likely to unfold, given that it would mean higher USD receipts into Egypt. Scenario 3 EFSA Rejects The Deal Out Of Hand Although we think the probability is relatively low, it is possible that the ESFA could just disqualify the tender offer citing, for instance, ongoing disputes regarding capital gains taxes and natural gas pricing. In addition to this, indirectly, Egyptian authorities could arm-twist the group into quickly resolving the issues related to taxes and gas pricing by just stopping/interrupting gas supplies to EFC and EBIC and/or stopping payments on contract receivables in Egypt. If the EFSA and the government go down this route, OCI may well take the case to the International Courts for Arbitration, as the Sawiris family has done in the past over the Mobinil stake and is now threatening to do so in the Djezzy dispute. We do not think this scenario does any party any favours and the probability of its being realized is therefore low, but it certainly cannot be ruled out amidst Egypt's current volatile environment. Scenario 4 OCI and the Egyptian authorities quickly come to an agreement over the main issues and approve the demerger As we said in a previous note, the move by OCI could also be seen as a gambit to force the government to the table to resolve the various outstanding issues and speed up the approval of the demerger. The government will today weigh the negative implications on portfolio inflows into Egypt and the impact on the investment banking industry as a whole, against a possible immediate remedy to its depleted FX reserves and longer- term benefits to the fiscal deficit. In our view, the latter is likely to win, but post-revolution decision making by the government is far from clear cut. Further, we believe that there is a “face-saving" aspect to this too, and the government may be worried that OCI's move to list outside Egypt may signal that its key corporations and entrepreneurs are deserting a sinking ship.
