EFG-Hermes on the defensive following reports of planned takeover

Egypt's largest investment bank rules out 'consolidation with any of its competitors in Egypt' after rival Beltone and billionaire Naguib Sawiris tender offer for 20% of shares

Egypt's largest listed investment bank EFG-Hermes appears to be on the defensive following media reports of a possible future merger between it and its competitor Beltone Financial Holding and seems to challenge a tender offer on 20 percent of its shares made by a consortium including the latter.
The statement released on Tuesday by the financial house's Board of Directors, comes a day after Egyptian financial daily Al-Mal reported, citing anonymous sources, that the tender on 20 percent of EFG-Hermes shares by Egyptian billionaire Naguib Sawiris's Dutch-based New Egypt Investment fund and Beltone Financial was only the first step towards a full merger between Beltone and EFG-Hermes.
“The Board feels that the highly dominant position of the Company in the market does not warrant the consideration of consolidation with any of its competitors in Egypt which would likely negatively affect the shareholders' value,” said EFG-Hermes.
“They are definitely referring to Beltone,” a senior analyst at one of Cairo's leading financial institutions told Ahram Online on condition of anonymity.
“EFG-Hermes has a very fragmented shareholder structure, with no major shareholders, with the BOD calling all the shots, but this deal would make New Egypt and Beltone combined the largest shareholder in the firm,” explained the analyst, “which is a jumping off point to becoming a major shareholder and having leverage over the management.”
According to Reuters, the government of Dubai was the largest shareholder in EFG-Hermes as of the end of last March, with an 11 percent stake in the company, of which 67 percent is in the form of free-floating shares.
New Egypt Investment is seeking to own 17.82 percent of EFG-Hermes, while Beltone will control 2.18 percent, according to the tender offer announced last week by the Egyptian Financial Regulatory Authority (EFSA).
EFG's defiant tone meets expectations from some in Egypt's financial circles.
“This, however, may trigger stiff resistant [sic] by the larger firm (EFG-Hermes) which we expect to react fiercely to the threat over the coming few days,” analysts at Cairo's Pharos Holding predicted on Monday, referring to reports of a future merger.
EFG-Hermes also seemed to challenge the consortium's offer of LE16 a share, which would value the deal at LE1.8 billion, announcing that it is appointing an Independent Financial Advisor (IFA) “to opine on the fair value of the stock and the fairness of the offer, upon its approval by EFSA, in order to help shareholders evaluate its attractiveness.”
Beltone Financial Holding's share price on the Egyptian exchange has soared by over 30 percent since the announcement of the tender, rising 3.51 percent on Wednesday to close at LE34.18.
EFG-Hermes saw its share price rise more slowly to hover under the offered LE16 a share mark, rising 0.07 percent on Wednesday to close at LE15.38.
Possible merger with Beltone
“In our view, an eventual full-fledged merger is likely the final outcome of the transaction,” Pharos stated in response to the Al-Mal story on an intended merger published on Monday.
A full-fledged merger between Beltone Financial and EFG-Hermes would best-achieve cost rationalisation for EFG, through economies of scale, according to Pharos Research.
“In our view, the primary route to create value from EFG-Hermes Holding is to rationalise cost as much as possible without jeopardising the quality of service,” say the analysts.
“The potential for synergy is extremely large if both sizeable revenue pools are spread on a smaller cost base,” says Pharos.
But other quarters are more cautious about the likelihood of a merger taking place based on apparent synergies.
“It all depends on the valuation of Beltone at the time of the merger, pricing being a deciding factor in whether the deal would be value-accretive or value-destructive to EFG-Hermes,” Walaa Hazem, fund manager at HC Securities and Investments, told Ahram Online.
EFG-Hermes is listed on Egypt's main securities index with a market capitalisation of LE8.8 billion ($1.2 billion), while Beltone Financial Holding has a market cap of LE276 million ($38.6 million).
The recent tender is only the latest of several attempts by Egyptian tycoon Naguib Sawiris to gain a foothold in EFG-Hermes, the largest publicly-traded investment bank in the region.
In 2012, Sawiris backed a takeover bid for EFG-Hermes by Planet IB, a group of Gulf investors and bankers, but dropped out after EFG shareholders opted for an alternative bid by Qatari investment bank QInvest.
The merger with QInvest itself fell through in May of last year after failing to win regulatory approval in Egypt, denying EFG a much-needed booster, after which the Egyptian firm announced it would cut costs and sell off non-core assets.
Egypt's equities market has suffered decline and stagnation, along with the rest of the country's economy, in the past three years since the January 2011 revolution which ousted long-time military strongman Hosni Mubarak.
Following the ouster of Islamist president Mohamed Morsi last summer, Sawiris, who had been in self-imposed exile with members of his family, told the press that he planned to invest in Egypt "like never before."
Sawiris, a founder of the liberal Free Egyptians party, was an outspoken critic of Morsi's rule.
The EFSA is currently waiting for the bidders to "meet the requirements relating to the buy offer," regulator head Sherif Samy told Reuters by phone on Monday night, without giving further details.
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