A regulatory battle over an offer to buy out shareholders in Orascom Construction Industries (OCIC.CA) may inflict damage on the Cairo stock market that lingers long after Egypt's politics stabilize and the economy recovers. Until recently, many foreign investors remained willing to buy Egyptian stocks despite the political conflict surrounding President Mohamed Morsi's government and the weakness of the economy, which has been hurt by a currency crisis. They assumed these problems would eventually be resolved. But in the last few weeks, the controversy over Orascom has raised a new worry: that Egypt's post-revolution government may be fundamentally unwilling to let the stock market operate freely, and may feel justified in intervening in the market whenever it feels its interests are threatened. If this perception takes hold, the market could struggle over the long term as businessmen hesitate to list their assets on it and investors shift to more market-friendly jurisdictions. “There is a lack of transparency in the OCI case, and this is a clear case of mismanagement from the authorities," said Osama Mourad, a Cairo-based independent financial analyst and former chief executive of Egypt's Arab Finance Brokerage. Trouble Under a deal announced in January, US investors including Bill Gates committed to buying a $1 billion stake in Egyptian fertiliser giant OCI NV, which is listed in Amsterdam. Accompanying the deal was an offer by OCI NV to buy out all the Cairo-listed shares of parent Orascom Construction, which is the market's biggest stock, accounting for nearly 15 percent of its capitalization of around $55 billion. Although Orascom issued a statement saying it would not entirely delist from the Cairo exchange, many analysts and investors saw the offer as a prelude to an eventual delisting. So did the government - and that has led to an escalating confrontation with the company. In late February, after Orascom shareholders approved the buyout offer at meetings in Cairo, the Egyptian Financial Supervisory Authority (EFSA) signaled a delay by saying it wanted more information about the transaction. Delisting At the end of February, Investment Minister Osama Saleh told state news agency MENA that the government was holding talks with Orascom Construction to dissuade it from delisting. Then the situation got nasty. In early March, the government said it was barring Orascom chief executive Nassef Sawiris and his father Onsi Sawiris from leaving the country as part of a probe into tax evasion. The Sawiris could not be reached for comment but a banker and friend of the family said the men were out of the country; they would be detained if they returned. Members of the Sawiris family have billion-dollar businesses in fertilizers, construction and real estate, making the family one of Egypt's biggest employers. So many investors and analysts saw the travel ban as contrary to the government's declared aim of attracting investors to Egypt. “If you want to attract investment, you don't punish the richest family in Egypt and people who employ thousands," Mourad said. Pragmatism The Sawiris family's businesses thrived under Egypt's pre-revolution ruler, Hosni Mubarak, so some investors see in the Orascom saga a sign that under the current regime, political enmities are trumping economic pragmatism. “Criminally pursuing the CEO of Egypt's largest listed company after the government drafted a law to reconcile with businessmen sends a very contradictory signal," said Mohamed Radwan, director of international sales at Pharos Securities. A day after the travel ban was announced, the EFSA said it was placing limits on the amount of shares which local companies could transfer into internationally traded global depositary receipts (GDRs). Analysts saw this as an effort to prevent other companies from imitating the Orascom buyout - effectively closing a channel for Egyptian businessmen to transfer ownership of their assets offshore. Such curbs could make other industrialists think twice about listing their firms in Cairo in future. Buyout: Many investors and analysts have now concluded the Orascom buyout may never go ahead. The first part of the buyout is largely complete; as of late February, holders of almost all of Orascom's GDRs, which account for about 75 percent of its share capital, had agreed to exchange them for OCI NV shares, according to statements from the companies. But the second part, a cash offer by OCI NV to buy Orascom's ordinary shares for 280 Egyptian pounds ($42) each, has not yet proceeded, and Orascom's market price shows decreasing confidence that it will. The stock closed at 240 pounds on Wednesday, down from 265 in mid-February, when the buyout plan still seemed in good shape. The Amsterdam-listed shares of OCI NV have also plunged, to $33 from around $40 in mid-February. Egyptian government officials have held two rounds of discussions with Orascom on the tax claim this week. Both have been inconclusive, but it is possible the claim could be resolved amicably. Even if that happens, however, the events of the last few weeks may have left a lasting impression that Egypt's regulatory environment has become more risky.
