April 19, 2024

DealBook: Egypt’s Disarray Puts a Regional Investment Bank, EFG-Hermes, in Play

LONDON — Yasser el-Mallawany and Hassan Heikal are accustomed to turmoil. In recent years, they have steered EFG-Hermes through political upheaval, economic pain and market volatility, transforming the Egyptian financial firm into the leading investment bank in the Arab world.

Now, the investment bankers face their own crisis. As deals dry up, Mr. Mallawany and Mr. Heikal are scrambling to sell a large piece of the business to a smaller rival in the gas-rich state of Qatar, which would give the firm capital to survive the current turbulence.

“We needed someone to support the investment banking business,” Mr. Mallawany said in a telephone interview, predicting that the business climate would be difficult “for the next two to three years.”

In a complex transaction, EFG-Hermes will put its investment banking, asset management and brokerage units into a joint venture with Qinvest. The Qatari firm, whose chairman is Sheik Hamad bin Jassim al-Thani, a member of the royal family and the son of the emirate’s powerful prime minister, will initially pay $250 million for a 60 percent share. The firm has the option to buy the remaining 40 percent later.

Like many of the region’s financial players, EFG-Hermes is suffering from the global economic slowdown and the fallout from the Arab Spring. In the bank’s home market, deals and stock trading have dried up. Investors are fretting about what kind of government will succeed Hosni Mubarak, the Egyptian president who was ousted last year.

Such uncertainty plagues the region. Investment banking fees in the Mideast broadly fell to $450 million last year from a peak of about $1.4 billion in 2007, according to Thomson Reuters.

EFG’s managers are betting the new partnership will give them an inside track to lucrative transactions. Qatar is among the most aggressive investors in the region. The state’s sovereign wealth fund has big stakes in global companies like Siemens, Volkswagen, Total and Xstrata.

The Qataris are trying to build a financial center of their own to rival Dubai. With EFG-Hermes, they will gain access to a regional network of 22 offices across the Mideast and 1,000 employees. EFG’s scale and experience combined with Qinvest’s “access to capital and clients,” said Shahzad Shahbaz, the chief executive of Qinvest, “creates a powerful combination.”

Despites it current challenges, EFG-Hermes is the only true regional investment bank.

The firm, which was started by Mr. Heikal’s uncle in the mid-1980s when the Egyptian financial markets were moribund, helped develop stock market indexes and other tools that have helped turn dusty, traffic-choked Cairo into a vibrant financial center.

The bank has worked closely with one of Egypt’s best-known entrepreneurs, Naguib Sawiris. In 2000, the bank helped lead the $370 initial public offering of his company, Orascom Telecom.

In recent years, Mr. Mallawany, 50, an easygoing banker formerly with a local Chase affiliate, and Mr. Heikal, 46, a charming yet hard-driving Goldman Sachs alumnus, have expanded the firm’s reach by making it a full-service investment bank with advisory services, a brokerage unit and fund management.

In 2004, EFG-Hermes helped the Saudi Arabian government sell its second mobile license for $3.5 billion. Two years later, it was the main banker on the $660 million listing of the mobile operator Du in the United Arab Emirates.

“There is no doubt that EFG was a major player in developing the capital markets,” said Sherif Kamel, dean of the business school at the American University in Cairo, and “putting Egypt on the map.”

Then the global financial crisis struck, and the deals in the Mideast slowed to a trickle. While the region perked up in 2010, the Arab Spring last year scared investors and activity plummeted again.

EFG-Hermes was a victim of the slowdown. Last year, the bank’s net income fell by 81 percent to $22 million, as brokerage fees, investment banking deals, and assets all declined sharply.

The bank’s problems go beyond its business. In many Egyptians’ minds, EFG-Hermes is associated with Mr. Mubarak’s sons, particularly, his onetime heir apparent, Gamal Mubarak. On May 30, the co-chairmen were among a group of men including Gamal Mubarak and his brother, Alaa, accused by the Egyptian state prosecutor of making more than $300 million in illegal profits through the sale of Al Watany Bank in 2007. EFG-Hermes advised a group of shareholders on the transaction, and its funds owned shares.

The EFG-Hermes board, which includes representatives of the Abu Dhabi Investment Authority, one of the world’s largest sovereign wealth funds and a nearly 10 percent shareholder, and Dubai, which owns nearly 20 percent, has rejected the accusations and defended the two chiefs. Insiders suggest the charges result from Egypt’s turbulent political climate, rather than misdeeds by the executives.

“The two C.E.O.’s have done a great job for shareholders, and the board has given them a vote of confidence,” said Mona Zulficar, a lawyer and the bank’s nonexecutive chairman, in a telephone interview. “I think you have to take this in the context of what is happening in Egypt — in the context of the legal environment that is so far not stable.” The legal and financial problems have taken their toll on the company’s shares. The bank’s total market value now stands at $743 million. Five years ago, the ruler of Dubai paid more than $1 billion for a 25 percent stake.

The two financiers face challenges for the Qinvest deal. EFG-Hermes shareholders approved the transaction in early June, but the investment bank is still awaiting the nod from regulators. The surprise sale of one of Egypt’s few corporate stars has also prompted a group known as Planet Investment Banking to threaten a hostile takeover offer, arguing that the Qatar deal undervalues the bank.

“To go and sell to Qatar for a song is testimony to your own ineptness,” Planet Investment’s chief executive, Ahmed el-Houssieny, a former private equity executive, said of EFG-Hermes management in a telephone interview. While it is unclear whether Mr. Houssieny has sufficient investor backing, the threat is weighing on the share price of EFG-Hermes.

The joint venture could also go sour. Star bankers at EFG-Hermes, for instance, may balk at moving to Doha, which despite a recent building boom remains a sleepy place with little in the way of night life or a singles scene. Two younger EFG executives, Karim Awad and Kashif Siddiqui, will run the joint venture day to day, but it will be important for the two seasoned co-chief executives, especially Mr. Heikal, who negotiated the deal with the Qinvest Chairman, to make sure it stays on track.

Still, Mr. Mallawany, 50, and Mr. Heikal, 46, are betting the deal will revitalize the bank’s fortunes. If they collect $1 billion in new capital from their new Qatari connections, the firm’s total assets would rise to $4 billion. That heft, the two say, would lead to more deals.

It is not an unreasonable expectation. Important players in Qatar view the global turmoil as an investment opportunity and are looking to plow more money into deals.

In this region, connections count. On Wednesday, Qatar Petroleum, the national oil company, agreed to put $360 million into a $3.7 billion Egyptian refinery project. EFG advised on the financing, which was led by Citadel Capital, a private equity fund where Mr. Heikal’s brother, Ahmed, is a major shareholder.

“With Qatar’s deal flow and liquidity, we can take EFG to a new level,” Mr. Heikal said.

Article source: http://dealbook.nytimes.com/2012/06/14/egypts-disarray-puts-a-regional-investment-bank-in-play/?partner=rss&emc=rss