EGYPT: An Introduction to Corporate/M&A

Egypt M&A 2023 – Strong M&A outlook despite current challenges 

Egypt's economy has undergone significant changes in recent years, with the government implementing a range of reforms designed to attract foreign investment, promote economic growth, restore macroeconomic stability, and improve the business environment. Egypt has become an attractive destination for foreign investors seeking to expand their operations in the region due to its strategic location, diverse economy, and vast potential for growth. Egypt has continued to attract investors from both the region and beyond, despite challenges such as the COVID-19 pandemic and the fluctuation of the exchange rate. M&A activity in Egypt has been robust in recent years and in 2022 in particular, and the trend is expected to continue in 2023.

Despite the positive trends, M&A activity in Egypt is facing substantial challenges emanating from inter alia the Russian-Ukrainian war, including a major outflow of foreign investment from the debt market resulting in a foreign currency liquidity shortage, inflation and major currency devaluation. The lack of availability of foreign currency has caused uncertainty for investors and has compelled the Egyptian government to enter into a 46-month arrangement under the Extended Fund Facility with the International Monetary Fund (IMF) in an amount of about USD3 billion.

In this overview, we'll take a look at the government’s plan to sell state-owned companies in compliance with the IMF requirements, the lack of availability of foreign currency and fluctuations in the exchange rate, the introduction of a pre-merger control regime, and will examine their impact on M&A in Egypt.

Privatisation Plan 

In February 2023, the government announced its plan to sell shares in 32 state-owned companies within a year through direct sales to strategic investors and listings on the Egyptian Exchange (EGX). This divestment of state-owned assets is an IMF requirement and part of the government's broader economic reform program aimed at, inter alia, boosting investment and reducing the budget deficit. The program includes various measures such as reducing energy subsidies, introducing new taxes, and streamlining bureaucracy to improve the business environment.

The planned privatisations include companies in a range of sectors such as banking, insurance, oil and petrochemicals, technology, and real estate. The government is intending to support social programs and reduce the budget deficit using the funds collected from the sales and IPOs.

The government's renewed push to privatize state-owned assets is expected to have significant implications on M&A activity in Egypt. Direct sales to strategic investors and listings on the EGX are expected to attract both local and foreign investors, particularly in sectors where state-owned companies have a leading market position. The privatisation program is also expected to stimulate competition, increase efficiency, and improve governance in the affected sectors, leading to new M&A opportunities. However, the success of the program will depend on the government's ability to implement it effectively and attract buyers at mutually acceptable valuations.

Currency and Fluctuations in the Exchange Rate 

The Egyptian pound has experienced significant volatility, largely due to external factors such as the Russian-Ukrainian war. Although the Egyptian government has taken steps to stabilize the currency, including the introduction of a flexible exchange rate regime in 2016, the Egyptian pound has fallen by nearly 50% since March 2022 and annual headline inflation has climbed above 20%.

Currency risk including the availability of foreign currency remains a key concern for companies doing business in Egypt. Companies and investors are encouraged to consider innovative structures including the implementation of hedging strategies to protect themselves against exchange rate risks and currency devaluation. Additionally, in the context of M&A transactions, we are seeing discussions and negotiations invoking material adverse change (MAC) due to the recent series of currency devaluations. Further, we are seeing more reliance on adjustments-based Sale Purchase Agreements (SPAs) as buyers are hesitant to adopt a locked-box structure amid the continuous fluctuations that would impact the valuation of the target company.

Pre-Merger Control Regime and its impact on M&A in Egypt

In December 2022, Egypt has promulgated amendments to the Egyptian Competition Law (ECL) introducing the pre-merger control regime (Amendments). Formerly, the ECL used to require concerned parties of M&A transactions that met certain financial thresholds to serve a post-closing notification to the Egyptian Competition Authority (ECA). Under the new regime, parties of a transaction that fall under the definition of “economic concentration” and which meet the statutory financial threshold, should obtain the ECA's prior approval on the transaction. The adoption of the Amendments brings the ECL much closer to modern competition regimes such as that of the EU.

Upon publication of the Amendments in the official gazette, the ECA issued a press release stipulating that the Amendments will not be implemented until the promulgation of the Executive Regulations. The Executive Regulations has not been issued to date and there is no visibility on the timeline for its issuance. This, therefore, creates uncertainty in respect of the date of application of the new regime and will particularly impact the deal certainty of M&A transactions.

Cross-border transactions and transactions which have been signed but not yet closed currently face uncertainty risks and ambiguity. For example, transactions whose closing is pending obtaining regulatory approvals or antitrust approvals from various jurisdictions could face considerable delays/uncertainty in case the Executive Regulations are issued prior to obtaining such approvals. This stems from the fact that the Amendments provide that phase one assessment consists of 30 working days; starting from the day of “completing” the filing, (with a possible extension of 15 working days in certain events) during which the ECA shall decide whether to approve the transaction or refer it to phase 2 assessment which consists of 60 working days from the referral decision (with a possible extension of 15 working days in certain events) during which the ECA is entitled to inter alia approve or block the transaction. It is also worth noting that the Amendments stipulate that the clock will start ticking for phase 1 assessment once the filing is complete without adding further details, which could arguably leave the decision of whether the filing is complete or not to the ECA’s discretion. Consequently, the entire period for the assessment may take longer than the periods set forth herein.

Considering the above, the Amendments will likely result in a longer period from signing to closing which will directly impact deal certainty. Thus, SPAs need to account for the same in relation to long stop dates as well as termination in case no ECA approval is issued. We further expect buyers to avoid locked-box SPAs and rather adopt adjustment-based SPAs to cater for any major deviation in the valuation of the target company between signing and closing.

Conclusion   

In conclusion, despite the current structural challenges outlined above, we expect strong M&A activity in Egypt in 2023 fueled by the government's decision to privatise state-owned assets which will attract foreign and local investors including sovereign wealth funds, private equity funds and strategic buyers.