Non-oil business activity sinks to three-year low

We have lots of M&A stories for you this morning and the first PMI reading of the new decade is in (and it isn’t pretty): Non-oil business activity fell to three-year lows in January on falling output and weak demand.

The UAE didn’t do much better, seeing its PMI enter contraction territory for the first time since 2009. Bloomberg has more on that.

We have chapter and verse on all of this in this morning’s Speed Round, below.

News triggers to keep your eye on over the coming weeks:

• Inflation figures will be published next Monday, 10 February;
• The Egypt Petroleum Show runs 11-13 February;
• The CBE will meet on Thursday, 20 February to discuss interest rates.

*** For our email subscribers: Our subject lines are back to normal for the next week. We dropped detailed teasers in December in favour of “Your morning briefing” as we fought the algorithms that determine whether we wind up in your inbox or not. We miss them (and, apparently, so do you), so we’re trying them out again and we’ll see what the data says next week.

*** Did you miss the results of our 2020 Enterprise Reader Poll? Check it out here.

The Kauffman Fellows are coming to Cairo this month: The global VC group will be in town for a series of networking events taking place on 13-15 February. The visit will kick off with an evening at the pyramids co-hosted by EFG Hermes, Swvl, Marakez and Vezeeta that will bring together a number of local and regional investors, businesspeople and media figures. AI startup and recent Making It guests Elves will then host a BBQ on 14 February featuring a handful of local startups, before AmCham and Endeavour organize a breakfast on the final day of the visit.

Hong Kong has reported its first death from China’s coronavirus, meaning the total deaths now stand at nearly 500 and the number of confirmed cases at over 20k. Hong Kong is now set to close some of its busiest checkpoints with mainland China, the Wall Street Journal reports.

The WHO is still urging people not to panic, noting that the virus has not yet shown much mutation or qualified as a pandemic (meaning its raging on two continents), the organization said at a briefing in Geneva.

Across the Atlantic: 24 hours late and after a genuinely confusing day, early results from the Iowa caucuses show Pete Buttigieg in the lead, narrowly ahead of Bernie Sanders. Elizabeth Warren and Joe Biden trail, but round out the top four. Head over to the New York Times or Politico to follow the numbers as they come in.

The final arguments in President Donald Trump’s impeachment trial took place on the US Senate floor yesterday. Pundits expect The Donald to be acquitted in a vote today. At dispatch time, Trump had made no mention of impeachment as he was delivering his annual state of the union speech touting his economic “wins” — Reuters and the NY Times have wall-to-wall coverage.

In other international miscellany: There’s optimism about Libyan peace talks in Geneva and Sudan is willing to work toward normalized relations with Israel, the country’s military leader told Israeli PM Benjamin Netanyahu in Khartoum.

We have lots of global auto news coming in this morning:

• The UK has a plan to ban the sale of all polluting cars by 2035, but the auto industry has deemed it unworkable. (Financial Times)
• Uber is looking at “radical” new financial innovation to become profitable, examining different ways of using and scaling a driverless car model. (Financial Times)
• As more companies begin to develop flying cars, safety concerns are at the forefront of the discussion. Porsche, Toyota, and Hyundai partnering up with aircraft manufacturers.(Wall Street Journal)

It’s Hardhat day — your weekly briefing of all things infrastructure in Egypt: Enterprise’s industry vertical focuses each Wednesday on infrastructure, covering everything from energy, water, transportation, urban development and even social infrastructure such as health and education.

In today’s issue: Hardhat looks at infrastructure bonds: what they are, and why the government is increasingly seeing them as a tool to fund its pipeline of infrastructure projects.

Economics and business were back in the limelight on the airwaves yesterday as the nation’s talking heads fixated on the CBE’s bid to revive manufacturing and the government’s structural reforms, among other topics.

Factory revival initiative moving forward: A committee with members from the Central Bank of Egypt (CBE) and the Egyptian Federation of Investors Associations has managed to resolve debt-related problems for 16 major factories with bad loans of over EGP 10 mn each as part of the second phase of a CBE and government-led initiative, Al Hayah Al Youm’s Hossam Hadad reports (watch, runtime: 5:25). The initiative has just entered its second phase, which targets factories that have been struggling post-2011 and have unfulfilled debt obligations. Phase one of the initiative saw local banks call off any legal action they’re taking against smaller factories with bad loans of less than EGP 10 mn. We have more on this here.

Over 4.5k factories have halted production due to theft, sabotage, and lack of funding following the 2011 revolution, economist Mostafa Badra told Hadad. Those factories have been slapped a combined EGP 100 bn from international courts (for several reasons, including falling back on deliveries and supplier payments) despite the source of their financial strain coming from factors “outside their control,” says Badra.

Madbouly briefs World Bank delegation on business, economic reforms: Prime Minister Moustafa Madbouly and International Cooperation Minister Rania Al Mashat briefed the World Bank Group team responsible for preparing the global ease of doing business report on structural reforms, Hadad noted (watch, runtime: 1:17).

Mahmoud Mohieldin’s appointment as UN special envoy gets special treatment: Masaa DMC’s Ramy Radwan celebrated in a 10-minute segment the appointment of veteran economist Mohamed Mohieldin as a UN special envoy for financing the 2030 development goals (watch, runtime: 10:47). We have the story in Speed Round, below.

Non-oil business activity sinks to three-year low: The contraction of activity in the non-oil private sector accelerated in January to a rate not seen since January 2017, according to the IHS Markit purchasing managers’ index (PMI) (pdf). The PMI gauge dropped to a three-year low of 46.0, down from 48.2 in December. A reading above 50.0 indicates that activity is expanding, while a reading below that mark means it is contracting. The sector’s health has been in decline for the past six months, in what is now considered “a solid deterioration.”

Falling output and weakening sales both contributed to the slowdown in activity, responders said. The drop in new orders was the sharpest seen in almost three years, as purchasing activity fell at its quickest rate in 28 months and export demand fell for the fourth straight month. The report notes that firms found that their reduced sales led to less input needs, which then limited purchases and stock levels.

Selling prices drop amid minor cost pressures: Companies have cut their prices for the third month running in an effort to stimulate demand. Firms were helped by a lower USD, while weaker demand translating into reduced cost inflation. But more expensive raw materials and increased living costs meant that expenses rose overall, albeit slightly.

Job numbers decline: Employment at non-oil businesses also dropped for the third consecutive month. January saw a trend of workers leaving in search of better jobs but not being replaced due to the weak demand.

Companies remain optimistic: Sentiment remains in keeping with what was seen on average over 2019, if slightly less upbeat overall. Respondents were divided on whether they expect to see output grow or the decline this year. Bloomberg and Reuters also had the story.

EGP overvaluation to surpass 20% in the coming two years -RenCap: Renaissance Capital has become “more bullish” on the trajectory of the EGP over the coming two years, forecasting the currency to remain stable this year before falling to EGP 16.2 against the greenback during 2021. In a report issued following its annual MENA Investors Conference at the end of January, the Russian investment bank says the EGP will become increasingly overvalued on a narrower-than-expected current account deficit and increasing inflows.

The EGP became the sixth most expensive EM currency last year, according to RenCap’s real effective exchange rate model. This trend is set to continue, with the investment bank forecasting the currency’s overvaluation to rise from 14% currently to more than 20% next year.

Overvaluation will be driven in part by larger-than-expected portfolio inflows into government bonds, which remain attractive after last year’s interest rate cuts by the US Federal Reserve. RenCap is now predicting Egypt will see USD 1 bn in inflows during 2020-2021, rather than USD 2 bn in outflows. The investment bank forecasts a smaller current account deficit than previously thought, ending FY2020-2021 at USD 14 bn instead of USD 16 bn.

Key risks to the currency include a return to double-digit inflation, large cuts to interest rates by the Central Bank of Egypt (CBE), and a turn towards a hawkish monetary policy at the US Federal Reserve. A notable increase in inflation or lower risk appetite among foreign investors could potentially trigger a “vicious cycle” of weakening whereby bondholders sell off their EGP treasuries, leading to a large sell-off.

The EGP’s trajectory post-2021 will depend on the country’s ability to industrialize: RenCap suggests that the dominance of the oil and gas sector in attracting FDI is continuing to hold back manufacturing growth. Lower interest rates — which the bank sees falling to 10.5% by June this year and 10% by June 2021 — combined with single-digit inflation and the government’s reform efforts should encourage more FDI into domestic industry, RenCap says.

North Africa will be the setting for the “second wave” of African industrialization: Egypt, Morocco, Algeria and Tunisia will each grow at annual 4.5-5.5% clip until the middle of the decade and 4-5% during the following 10 years. Strong literacy levels and an abundant supply of electricity will enable the four countries to intensify industrial growth, and foreign direct investment may soon begin to enter Egypt’s manufacturing sector, given the country’s cheap labor market relative to the EU.

M&A WATCH- STC could be required to submit a mandatory offer for 100% of Vodafone: Saudi Telecom Company (STC) is required by law to submit a mandatory tender offer (MTO) for the 44.8% stake in Vodafone Egypt owned by Telecom Egypt (TE) and the 0.2% held by minority shareholders if it closes its bid to acquire the other 55% from Vodafone Group, Al Wafd reports, quoting unnamed sources from the Financial Regulatory Authority (FRA).

How would this happen? Article 325 of the Capital Markets Act’s executive regulations states that an MTO must be presented by any party acquiring a majority stake in a company that has sold its shares through a public offering in a primary market at any point in time, even if the company is no longer listed at the time of acquisition. This applies to Vodafone Egypt, which was listed on the EGX until 2007.

If TE is looking to offload its stake, this is its golden ticket: According to analysts quoted by several news outlets this week, TE is more likely to sell its stake than it is to call on a right of first refusal to pre-empt the STC bid. Offloading the stake would help the state-owned company finance its operations, but the question is whether STC would buy it.

On the other hand, Vodafone Group will likely pay a capital gains tax on the sale in the UK, not Egypt, the local press reports, citing sources close to the bid. The transaction would still be subject to a 0.3% stamp tax in Egypt on the buyer and an equal percentage on the seller that calculated on the total USD 2.4 bn value, former vice minister of finance for tax policy Amr El Monayer said earlier this week.

M&A WATCH- With profits hitting record highs, Egypt’s banks are ripe M&A targets — but nobody really wants to sell, Bloomberg says. “It’s more of a question of who’s willing to sell than who’s willing to buy. They’re rarely up for sale,” Naeem Brokerage head of research Allen Sandeep tells the business information service. The country’s banks capitalized on the high interest rate environment that followed the 2016 EGP float by piling into high-yield treasury bonds and bills, resulting in “excessively strong balance sheets” that have made the banks highly attractive acquisition targets.

Acquisitions are currently the only way into Egypt’s banking sector, as the Central Bank of Egypt has for years refused to issue new banking licenses and has instead pointed potential market entrants to acquisition targets among the country’s 38 licensed banks. The preference for acquisitions goes back to the early-2000s, when the CBE successfully drove the cleanup and consolidation of the banking industry after the non-performing loans crisis of the late 1990s.

Case in point: Lebanon’s Blom Bank has denied that it is looking to sell its Egypt unit, with bank sources telling Al Arabiya that it has no intention to sell or enter negotiations with prospective buyers. Local press reports had alleged that an unnamed major Saudi bank had made an offer to acquire Blom Egypt, the newspaper says. The report comes less than a week since First Abu Dhabi Bank confirmed that it is negotiating to acquire the Egypt arm of Bank Audi, raising speculation that other Lebanese banks might pull out from foreign markets to provide liquidity to cope with the country’s ongoing financial crisis. Blom reportedly has sufficient capital and does not need to follow Bank Audi in exiting their overseas units, the sources say.

M&A WATCH- Naguib’s Ora Developers acquires 60% of Qatari Diar's City Gate project: Egyptian businessman Naguib Sawiris has agreed in principle to acquire 60% of Qatari Diar's stalled City Gate project through Ora Developers for USD 658 mn, the local press reports, citing unnamed sources. The acquisition would resolve Qatari Diar’s four-year legal row with the New Urban Communities Authority and dispute with the government, while giving it the exit it has been looking for. Previous reports had suggested that Ora Developers was in “advanced talks” to acquire a 51% stake in the project for USD 800 mn before Diar offered to amend City Gate’s customer contracts in exchange for them dropping lawsuits against the company last month.

What does the agreement entail? The agreement, which Sawiri says has yet to be finalized, will see the two companies forming a partnership to develop the project. Diar will also have to pay EGP 1.25 bn fine to the New Urban Communities Authority for the delay in completing the project before activating the partnership agreement.

M&A WATCH- Starch and Glucose Company approves Cairo 3A acquisition bid: The Egyptian Starch and Glucose Company’s (ESGC) board of directors has greenlit Cairo 3A’s bid to acquire all of Americana Group, Americana Egypt, and Cairo Poultry’s shares in ESGC, according to a bourse disclosure (pdf). The three shareholders, which hold a combined 91.5%, had approved the acquisition offer earlier this week. Cairo 3A will now move ahead with due diligence, which will be completed by 9 April then make a mandatory tender offer by 12 April. The price will fall in the range specified in Cairo 3A’s initial offer of EGP 8.98 – 10.8 per share, which values the stake at EGP 450-510 mn.

IPO WATCH- Banque du Caire to offer 45% stake in 1H2020 IPO: State-owned Banque du Caire (BdC) will offer a 45% stake on the EGX in 1H2020, Banque Misr Chairman Mohamed Eletreby said, according to Reuters. Banque Misr is BdC’s majority shareholder. BdC chairman Tarek Fayed said last year that the bank could offer as much as 49% in its EGX debut, which will be the first IPO under the privatization program. Eletreby also ruled out issuing global depository receipts, confirming reports last week that the bank will not be seeking dual listing.

BdC is within its timetable to IPO, with the second leg of its roadshow set to begin soon as officials leave to the US to gauge investor demand, having received “large” demand from major investment funds in London, Dubai and Abu Dhabi in the first leg.

IPO WATCH- Egypt Gold gears up for EGX debut this year: Egyptian jewelry brand Egypt Gold plans to IPO on the EGX sometime in 1H2020, Chairman Mostafa Nassar told Al Mal, without providing details on the value of the offering or a specific timeframe. The company made the announcement as it inaugurated its first gold chain factory in Obour City, which is expected to produce 1 tonne of jewelry each month.

Is an agreement with Centamin in the making? Nassar said that the company has contacted Centamin to request purchasing the entire annual production from its Sukari mine in the Eastern Desert. Centamin did not immediately respond to Enterprise’s request for comment.

Tourist spending in Egypt is expected to hit USD 29.7 bn in 2024 from USD 16.4 bn in 2019, according to Colliers International forecasts (pdf). German tourists accounted for the largest share of spending in Egypt last year, and continued to be the top tourism source market for Egypt with 2.5 mn visitors in 2019. Colliers expects the influx of tourists from Germany, Ukraine, Saudi Arabia, Libya, and Sudan — currently the top tourism source markets — to rise 27% by 2024 to 8.8 mn. Egypt is also expected to see an 11% y-o-y increase in Gulf tourist arrivals this year, which Colliers says will likely be driven by Saudi visitors.

Gov’t targets raising tourist arrivals by 130%: The Tourism Ministry is looking to boost the number of tourists visiting Egypt to 30 mn people, Minister Khaled El Enany told Sada El Balad (watch, runtime: 01:03:30). The minister did not specify a timeframe for this goal, which would be a 130% increase from the 13 mn visitors Egypt welcomed in 2019. The ministry is planning to achieve this target by increasing flights between popular destinations in Egypt, including Sharm El Sheikh, Hurghada, and Luxor, and attracting higher-caliber tourists that would spend more on average to also increase tourism revenues. The 2018 Egyptian Tourism Reform Program (E-TRP) also saw the launch of several international promotional campaigns to attract tourists.

CIB could issue up to EGP 15 bn in financial instruments to finance its planned expansion, according to a bourse disclosure (pdf). The bank will convene a general assembly on 15 March to review the potential issuance, the statement says. The announcement comes as CIB reported net profits of EGP 11.8 bn in 2019, a 23% increase annual increase.

The bank’s board of directors is also proposing increasing its paid-in capital by about EGP 4.9 bn to EGP 19. 7 bn by distributing one share for every existing three shares, it said in another disclosure (pdf). The bank also approved distributing cash dividends of EGP 1.25 per share for 2019.

REGULATION WATCH- Gov’t looking to get a cut of mining profits through freecarry: The government is mulling the implementation of a freecarry interest mechanism on mining projects to collect a percentage of their net profit every year, Al Mal reports, citing an unnamed government source. The new interest percentage would be applied in addition to, not instead of, the new tax, rent, and royalty model that the government had set last month.

What exactly does this entail? The new model would be implemented somewhat similarly to a signing bonus, allowing the government to collect a cut of annual net profits from companies licensed to operate mines and quarries. The percentage would not be fixed and would be negotiated separately with each new license. Since all other expenses — including tax, royalties, and rent — are fixed, this percentage will be among the main determinants used by the government in awarding concession areas to companies. This would only be applied to expensive minerals that can be extracted at a lower cost.

Background: Private mine and quarry operators will pay out royalties of up to 10%, income tax of 22.5%, and EGP 25k a year per square km in concession rent under an amendment to the Mineral Resources Act last month – coming only a week after Prime Minister Moustafa Madbouly issued the bill’s executive regulations. The new bill was praised by industry players who see it as making the sector more attractive. Bn’aire Naguib Sawiris had also expressed interest in the gold and copper mining industry as a result of the changes.

KUDOS- Ten Egyptians make it to Forbes Middle East Power Businesswomen list: Egyptian women have worked their way up to becoming some of the most powerful businesswomen in the Middle East, topped by Zulficar & Partners founding partner and EFG Hermes chairperson Mona Zulficar, who ranked #24 on Forbes’ list of powerful MENA businesswomen. Also making the list:

• #31: Pakinam Kafafi, CEO of Taqa Arabia
• #33: Elham Mahfouz, CEO of Commercial Bank of Kuwait
• #40: Yasmine and Farida Khamis, Oriental Weavers
• #53: Hend El Sherbini, CEO of LSE-listed IDH
• #60: Mervat Zohdy El Sayed Soltan, chairperson of the Export Development Bank of Egypt
• #69: Reem Asaad, Middle East and Africa vice president at CISCO
• #75: Hoda Mansour, managing director of SAP Egypt
• #81: Abir Lehita, CEO of Egytrans
• #92: Noha El Ghazaly, managing director of Pharos Holding.

MOVES- World Bank Group senior VP and high profile economist Mahmoud Mohieldin was tapped as UN special envoy on financing the 2030 development agenda, according to an official statement. Mohieldin, who was a Mubarak-era investment minister, is an economics professor at Cairo University and a visiting professor at several renowned institutions, including Durham Business School.

MOVES- Abdel Hamid Abu Youssef and Ashraf Nessim have been appointed as interim executive officers of Orascom Development Egypt following CEO Khaled Bichara’s death in a car accident late last week, according to a bourse statement (pdf). Nessim was formerly Orascom’s CFO and is a current member of the company’s board of directors. Abu Youssef was formerly the company’s Chief Hotels Officer and has now been given a seat at the board.

MOVES- Former Social Solidarity Minister Ghada Wali began her newly-appointed role as director-general of the UN Office in Vienna and executive director of UNODC. Wali served as Egypt’s Social Solidarity Minister between 2014 and 2019.

MOVES- Hassan Samir has been appointed as Prime Holding’s managing director for capital markets, the local press reports. Samir has been with the brokerage firm for 16 years, including an seven-and-a-half-year stint as managing director for Prime Securities from 2012 until the end of January 2020.

Popular Egyptian actress Nadia Lutfi died yesterday aged 83 following complications from an undisclosed illness, the Egyptian Actors Syndicate . Lutfi’s career began in 1958, and in her first 11 years of working she made almost 50 films, many of which were adaptations of Naguib Mahfouz novels. She was one of the country’s best-known actresses during Egypt’s golden age of cinema.

Shoukry, Lavrov talk resolving Palestinian crisis amid controversial US plan: Foreign Minister Sameh Shoukry and his Russian counterpart Sergei Lavrov agreed on the need for cooperation to fairly and comprehensively resolve the decades-old Palestianian-Israeli conflict amid the controversy caused by the US’ Middle East peace plan, according to a ministry statement. The EU also rejected parts of Trump’s Mideast plan yesterday, Reuters reports.