Egypt - The Egyptian market is optimistic about the prospects of mergers and acquisitions (M&A) in the coming year, following the announcement of Egypt’s success in achieving a dollar yield that narrows the gap between the official and parallel exchange rates of the Egyptian pound against the US dollar. This gap has been the main obstacle for M&A activity, as it made it difficult to value assets accurately.

Egyptian assets have faced a long period of valuation challenges, whether in selling, merging, or buying, due to the existence of two exchange rates, which resulted in the delay or cancellation of many deals. M&A activity in Egypt dropped by 62% last year, reaching $3.48bn through 139 deals during the year, according to the latest report issued by the legal consulting firm Baker & McKenzie last week.

The report added that the M&A deals completed in the second half of 2023 saw a 32% increase in the number of deals, with 79 deals compared to 60 deals in the first half of the same year. The total value of these deals also rose by 383%, amounting to $2.8bn compared to $597m, based on data from LSEG on global M&A activity.

The decline was not only limited to Egypt but also affected the Middle East region, where deal-making decreased during the fiscal year 2023 by 4.7% in terms of deal volume and by 2.2% in terms of value. The decline in completed M&A deals in the Middle East region is attributed to the weak performance of domestic deal volume and the 7% decrease in the volume of cross-border deals.

Mohamed Ghannam, the managing partner at the office of Helmy, Hamza & Partners, Baker & McKenzie Cairo, said: “Despite the decline in M&A activity witnessed by the world, the performance of the Middle East region was slightly low, but it had a strong average in terms of value. This shows the ability of companies to adapt and the changing nature of the dynamics of M&A in this region.”

He emphasized that although deal volumes in Egypt declined throughout the past year, the significant growth in the total value of these deals in the second half of 2023 indicates strategic growth and important deals being pursued.

He explained that the total deal activity in Egypt remained weak throughout most of the fiscal year 2023, but December was the strongest month, with 20 deals completed. As for the value of deals, December surpassed all other months in the aforementioned year, as the value of deals completed during it reached $1.6bn, a div that exceeds the monthly values recorded in 2022.

The volume of domestic deals witnessed a considerable decrease of about 51%, reaching 52 deals for the whole year compared to 106 deals in the previous year. On the other hand, the value of deals during the whole year increased by 48%, reaching $1.8bn compared to $1.2bn in 2022.

Hany Nasef, the partner in charge of M&A at Baker & McKenzie Cairo (Helmy, Hamza & Partners), recognized the significant challenges that M&A activity in Egypt faced in 2023. However, he noted that the increase in the total value of these deals in the second half of the year showed resilience and the persistence of opportunities in the market.

Nasef also said: “Moreover, the global market fluctuations and those in the Middle East confirmed the dynamic nature of M&A deals and their diverse impacts on both domestic and cross-border transactions.”

Cross-border deals declined in both volume and value compared to the 2022 fiscal year. Deal volume dropped from 189 to 87, while the total value decreased by 80%, falling from $7.8bn in 2022 to $1.6bn in 2023.

Most of the cross-border deals in Egypt in 2023 were inbound transactions – 69 deals worth a total of $1.4bn. In contrast, only 18 outbound deals were completed, with a combined value of $112m.

The financial services sector was the most attractive area for inbound investments in the country, with 18 deals. It was followed by the consumer products and services sector, and then healthcare and advanced technology, each with 7 deals.

In terms of value, the essential consumer goods sector had the most significant deals in the 2023 fiscal year, with a total value of $629m.

The report highlighted the acquisition of a 30% stake in Eastern Company by the United Arab Emirates’ Global Investment Holding Company Limited for $669m as the largest deal of the year. The deal involved buying shares in the state-owned Egyptian Chemical Industries Company (ECIC), specifically in its subsidiary, the Eastern Company, for a total of EGP 19.281bn, or about $625m.

Regarding outbound M&A activity from Egypt, these deals accounted for 21% of all Egyptian cross-border transactions in the 2023 fiscal year, with 18 deals worth a total of $112m. Saudi Arabia was the main destination outside Egypt for that year, with 25 deals, followed by the United Arab Emirates with 9 and Kuwait with 6.

Yasser Omara, Chairperson of Eagle Capital, forecasted a surge in M&A activity in Egypt in 2024. He attributed this expected growth to the stabilization of the Egyptian pound against the US dollar, achieved by the Egyptian government’s efforts to provide dollar liquidity and narrow the gap between the official and parallel market exchange rates.

Amara also stated that financial consultancy firms had started to consider the investment flows from the Ras El-Hekma development deal when valuing mergers, acquisitions, and initial public offerings (IPOs) that had been delayed or halted due to economic challenges. He explained that with the resolution of the currency crisis and the increasing availability of foreign currency, investment risks in Egypt were likely to decrease, as well as the risks related to exposure to global markets.

Sara Saada, a macroeconomics analyst at CI Capital, gave a wider perspective, stressing the importance of the overall investment climate and the availability of investment opportunities in the Egyptian economy.

Saada added that implementing structural reforms, such as removing tax exemptions for government entities, would improve the investment climate by creating a more level playing field for both the private and public sectors. She indicated that the investment environment in Egypt could see further improvement after the completion of the remaining structural reforms and the agreement with the International Monetary Fund (IMF) on a loan.

A recent report by PricewaterhouseCoopers (PwC) on M&A activity in the Middle East region identified market uncertainty and fluctuating market conditions as the primary reasons behind the slowdown. However, the report also noted that such periods often present opportunities for valuable asset valuations.

The report further explained that the slowdown began in 2022 and continued into the following year, particularly due to rising interest rates, increasing inflation, and looming recession concerns.

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