EGYPT: An Introduction to Corporate/M&A
In the face of various economic and political challenges and major geopolitical headwinds, Egypt has launched and implemented significant legislative reforms and strategies to attract foreign investment.
In terms of challenges, the country is currently facing significant multiple headwinds primarily resulting from the recent Israeli-Palestinian conflict, including the disruption of maritime transport in the Red Sea and through the Suez Canal, and the ongoing Russia-Ukraine war. Such major geopolitical events resulted in a shortage in foreign currency liquidity, local currency devaluation and inflation. The uncertainty created by the foreign currency deficit led the Egyptian government to enter into a 46-month Extended Fund Facility Agreement with the International Monetary Fund (IMF), with a value of approximately USD3 billion. It is important to note that Egypt is in discussions to potentially increase the amount of said Extended Fund Facility and obtain new loans.
Under this agreement, Egypt has committed to promoting private sector involvement, reducing debt and inflation levels to pre-pandemic levels, and offering stakes in several state-owned enterprises to strategic investors by 2024. 2023 has indeed witnessed the initiation of the divestment process from state-owned companies with Abu Dhabi’s sovereign wealth fund acquisition of minority stakes in three state-owned oil and petrochemical companies (namely, Egyptian Linear Alkyl Benzene, Egyptian Ethylene and Derivatives Company, and Egyptian Drilling Company) as one of the latest examples. Additionally, as part of a long-term plan to strengthen the Egyptian economy and market, Egypt joined the BRICS, effective early 2024.
In this overview, we will focus on the planned divestment of state-owned enterprises, the challenges posed by limited access to foreign currency and resulting exchange rate volatility, the ongoing uncertainty surrounding pre-merger control regulations, and the expected outcomes of Egypt’s membership in the BRICS.
Privatisation Plan
In February 2023, the government announced its intention to divest its stake in 32 state-owned companies through direct sales to strategic investors and listings on the Egyptian Exchange (EGX). This divestment initiative is mandated by the IMF and is an integral part of the government’s comprehensive economic reform programme. The programme aims to promote investment and address the budget deficit, among other objectives. To achieve these goals, the programme includes various measures such as reducing energy subsidies, implementing new tax provisions, and streamlining bureaucratic processes to improve the overall business environment.
In August 2023, the government announced that it had collected USD5 billion from the sale of stakes in 13 companies between March 2022 and July 2023. Moreover, the Egyptian government plans to attract an additional USD5 billion through the offering of power plants and state-owned companies from October 2023 to the end of June 2024. As part of this plan, the government expanded the list of companies from 32 to 35, including Eastern Company, Al Ezz Dhekela, and Telecom Egypt.
Egypt experienced a series of significant transactions in 2023, demonstrating the country’s thriving business environment and attracting attention from both domestic and international investors. In a momentous move, Talaat Moustafa Group successfully acquired a 39% stake in a distinguished collection of seven historic hotels. The properties involved in this acquisition are the Cairo Marriott Hotel, Marriott Mena House, Steigenberger Hotel, Steigenberger Cecil, Sofitel Legend Old Cataract, Mövenpick Aswan, and Sofitel Winter Palace Luxor.
Furthermore, ADQ, a prominent entity, made substantial strides in the petrochemicals and drilling sector by acquiring significant stakes in key Egyptian companies. ADQ successfully secured a 35% stake in Egyptian Linear Alkyl Benzene (Elab), 30% stake in the Egyptian Ethylene and Derivatives Company (Ethydco), and 25% stake in the Egyptian Drilling Company (EDC).
Also, Egypt executed a significant divestment by selling a 31% stake in Al Ezz Dekheila Steel, a prominent player in the steel manufacturing industry. This transaction signifies the government’s commitment to promoting a diversified ownership structure within the sector and fostering a competitive marketplace.
These developments, among others, demonstrate effective implementation of the investment-friendly initiatives taken by Egypt and are anticipated to foster competition, improve operational efficiency, and enhance corporate governance in the relevant sectors, thereby creating new M&A opportunities in 2024.
Currency Fluctuations
The Egyptian pound continues to experience volatility as a result of various factors. Despite the efforts made by the Egyptian government to stabilise the currency, such as implementing a flexible exchange rate policy and implementing programmes to increase the inflow of foreign currency, the Egyptian pound depreciated by approximately 25% in 2023. Furthermore, the annual core inflation rate in November 2023 reached 35.9%.
The presence of currency risk, including the availability of foreign currency, remains a significant concern for businesses operating in Egypt. Companies and investors are advised to explore innovative structures and employ hedging strategies to safeguard themselves against exchange rate risks and currency devaluation. In the context of M&A transactions, discussions and negotiations are increasingly incorporating the concept of material adverse change (MAC) in order to mitigate the impact of currency devaluation. Moreover, there is a growing reliance on adjustments-based Sale Purchase Agreements (SPAs) as buyers express hesitancy towards adopting a locked-box structure due to the continuous fluctuations that could impact the valuation of the target company.
Pre-Merger Control Regime and its Impact on M&A in Egypt
In December 2022, Egypt implemented a new pre-merger control regime (“New Regime”), which requires parties involved in a transaction meeting the definition of “economic concentration” and meeting the prescribed financial threshold to obtain the prior approval of the Egyptian Competition Authority (ECA) for the transaction.
Following the adoption of the New Regime, the ECA issued a press release stating that the implementation of the same would be postponed until the Executive Regulations of the Egyptian Competition Law are promulgated. The timing of the issuance of these Executive Regulations is uncertain, which may create ambiguity and uncertainty for investors regarding the timing of the transaction’s completion. This uncertainty becomes particularly significant if the regulations are issued after the signing but before the closing of the transaction.
Given the timelines for filing and examining the applications under the New Regime, it is expected that the implementation of the New Regime will result in a longer period between signing and closing of transactions, directly impacting deal certainty. As a result, SPAs should take into account the extended time required for completion and incorporate provisions such as a long stop date and termination clauses in the event that ECA approval is not obtained. Additionally, SPAs typically include provisions obligating the parties to submit the required application under the New Regime once the Executive Regulations are issued after the fulfillment of conditions precedents and prior to closing.
Egypt and BRICS
In August 2023, the official announcement was made regarding Egypt’s forthcoming membership in the BRICS, effective from January 2024.
The accession of Egypt to the BRICS group is anticipated to have a positive impact on M&A activities as it presents considerable opportunities for co-operation with the economies of its member states and the operators therein, thereby enhancing trade exchanges and facilitating cross-border M&A transactions which in turn will bolster the competitiveness of Egypt’s economy.
Conclusion
In conclusion, despite the abovementioned challenges, we expect strong M&A activity in Egypt in 2024 fuelled by the launched privatisation programme and the government’s continuous endeavors to increase the engagement of foreign and private investors in the Egyptian market.