EGYPT’s share market may be weeks away from losing its biggest stock, dealing a fresh blow to a market that is already grappling with political instability and a weak economy.
Under a deal announced last month, a group of US investors including Bill Gates committed to buying a $1bn stake in Egyptian fertiliser giant OCI NV. The deal is a vote of confidence in Egypt’s economy and provides a badly needed flow of hard currency into Egypt. But it includes an offer to buy out all the Cairo-listed shares of parent firm Orascom Construction Industries.
Analysts believe the result could be a delisting of Orascom Construction from the Cairo market, or at least a drastic reduction in the number of its shares that are available for trade there. Since Orascom Construction accounts for about 15% of the Cairo market’s total capitalisation of about $57bn, its departure could sap trading activity and investor interest in the market just as political and economic events are conspiring to do so as well.
"The OCI deal is sending a gloomy picture in terms of the liquidity and market cap," said Mohamed Radwan, director of international sales at Cairo’s Pharos Securities. "It’s not the kind of signal you want to send to attract more foreign direct investment," he said.
Amsterdam-listed OCI is offering to acquire all the global depositary receipts (GDR) of Orascom Construction in exchange for shares in OCI. GDRs are certificates representing ownership of shares, and are widely used to facilitate trade by foreign investors in emerging market stocks. OCI is offering to acquire all of Orascom Construction’s ordinary shares, in exchange for OCI shares or a cash amount of 280 Egyptian pounds ($42) a share. Since that cash amount is about 9% higher than Orascom Construction’s average share price last year, it looks attractive to investors. The shares are trading near 266 Egyptian pounds.
By last Thursday, holders of 97.2% of the GDRs, representing 74.4% of all outstanding shares, had accepted the offer, according to the most recent data. If holders of more than 95% of outstanding shares vote to accept, securities rules suggest Orascom Construction could be delisted, analysts say. The GDR offer will close late on Thursday.
In a nod to the national sentiment of Egyptians, Orascom Construction has insisted it will not disappear completely from the Egyptian exchange. In a statement, it said it would maintain its presence on the exchange either directly or through an Egyptian depositary receipts programme to be launched by the company.
But given the disarray of Egypt’s capital markets, it may be difficult to arrange any large, new public offer of shares by Orascom Construction. So analysts expect the number of its shares listed in Cairo to drop sharply, or for the company to delist entirely. "Egypt is losing a blue chip — it’s not a good point for the market," said Sebastien Henin, portfolio manager at Abu Dhabi investment firm The National Investor.
In the short term, OCI’s offer could actually support prices of other stocks in Cairo, some analysts believe. That is because local investors, deprived of the opportunity to put money into Orascom Construction, may turn to other members of the handful of large, liquid blue chips such as Commercial International Bank, Orascom Telecom and Telecom Egypt.
Anticipation of this may have helped to support the blue chips’ prices over the past several weeks. Telecom Egypt, for example, is up 4% since the end of last year, despite a string of negative economic news since then, including a sharp drop in Egypt’s currency reserves.
The loss of Orascom Construction’s capitalisation could also hurt foreign fund flows into the Egyptian market.