JORDAN'S PARTIAL PRIVATIZATION OF PHOSPHATE

C O N F I D E N T I A L AMMAN 002073

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/21/2016
TAGS: EFIN KPRV EMIN EIND ECON JO BX
SUBJECT: JORDAN'S PARTIAL PRIVATIZATION OF PHOSPHATE
COMPANY OPENS DOOR TO INVESTMENT DOLLARS FROM BRUNEI


Classified By: Ambassador David Hale for reasons 1.4 (b, d).


1. (C) SUMMARY: Jordan's recent sale of a 37% stake in the
Jordan Phosphate Mining Corporation (JPMC) to the Brunei
Investment Agency (BIA) for US$110 million met with public
and parliamentary disapproval before the deal was concluded.
Given BIA's overall size of over US$100 billion, the
investment in JPMC is small for BIA but represents its first
venture into the Middle East. While other international
companies expressed interest in taking a stake in JPMC, GoJ
officials indicate the strategic decision to pursue a deal
with BIA was made in 2004 at the highest levels. Some MPs
voiced opposition to the sale, prompting negative publicity
and a GOJ effort to convince legislators of the benefits of
the transaction. The sale's price and conditions, however,
indicate a highly favorable deal for Jordan, and a successful
first step by King Abdullah to court the Sultan of Brunei and
pave the way for future investments from the BIA. It remains
unclear if this privatization enhances JPMC's position in
global phosphate commodity trading; only a promised BIA
business plan will tell. END SUMMARY.

STRUCTURE OF THE DEAL
--------------


2. (U) The cabinet March 14 approved the GoJ's sale of 37% of
JPMC, the world's sixth-largest miner and producer of
phosphate and phosphate-based products, to BIA for US$110
million, leaving 26% of the company in government hands.
Through continuing investments by Jordan's pension
administrator, the Social Security Corporation, the
government retains another indirect 16% of the company, for a
total of 40%. Additionally, the government will continue to
collect US$16 million annually from JPMC in mining fees and
taxes. BIA's purchase price was US$4/share, above the
US$3.80/share valuation by HSBC (the GoJ's banking advisor
on the sale),but less than the US$6/share the company was
trading on the Amman Stock Exchange (ASE) when the deal was
signed. As part of the sale, the government retains its veto
power on all management decisions. Additionally, BIA is
barred from reducing the workforce - described by financial
analysts who track the company as being 25-33% overstaffed -
for the next three years.

WHY OWN THE COW WHEN YOU GET THE MILK FOR FREE?
-------------- --


3. (C) As it moves forward on its privatization agenda, the
GoJ's financial rationale for the sale of JPMC relies heavily
on the logic that it will continue to collect a majority of
its current revenue from JPMC without owning a majority of
the company. In 2004, JPMC turned profit for the first time
in many years. With a 66% stake in JPMC, the US$6.1 million
profit generated US$4 million for the government's share in
the company. This number was dwarfed by the additional
US$11.2 million generated in mining fees plus US$5.7 million
in taxes for the government. With the 37% share sale, the
GoJ will continue to collect mining fees and taxes but will
forego 37% of the company's profit. Using 2004 financials as
a baseline, this is approximately US$2.24 million, an amount
that would take, at current profit levels, approximately 49
years to equal what BIA is paying for its stake. In a
meeting with EconOff on March 16, Executive Privatization
Commission (EPC) Chairman Mohammed Abu-Hammour cited a
similar rationale, pointing out that future profits for the
company are not guaranteed with "things not in favor for the
company long-term." (See para 6.)

ALLEGATIONS OF A LOW SALE PRICE
--------------


4. (C) Asked to address the concern by some that the GoJ had
sold the 37% JPMC share at a major discount to the company's
share price on the stock exchange, Abu-Hammour provided a
number of explanations. First, the price paid by BIA of
US$4/share is above the fair market price of US$ 3.80/share
that HSBC determined for JPMC. Second, only 3% of the
company trades on the stock exchange. According to
Abu-Hammour, attempting to "float 37% of the company on the

market would lead to a fall in the price," generating a more
realistic valuation than the US$6/share the stock was trading
at when the BIA purchase was announced. Third, in his own
estimation, the ASE "is in a bubble" and suffers from
overvaluation and speculation that do not provide a fair per
share price for the company.

WHY BRUNEI?
--------------


5. (C) GoJ officials confirmed that negotiations for a JPMC
stake with BIA were initiated as early as 2004. Abu-Hammour
admitted that he was surprised when, after becoming Chairman
of the EPC in April 2005 and requesting interest from
international bidders in JPMC, the Prime Minister informed
him that a fast-track process had already been underway with
BIA since 2004. Abu-Hammour said he requested and received a
letter from the Prime Minister stating that Bassem Awadallah,
then Minister of Planning, had initiated negotiations with
BIA at the request of the King. Abu-Hammour went on to say
that the letter gave him clear instructions to carry out
negotiations solely with BIA and to complete the sale by the
end of 2005.


6. (C) When asked if the retraction to other interested
parties in October 2005 may have fostered a lack of
transparency, Abu-Hammour replied that the transaction was
handled with as much transparency as possible, and that the
GoJ was motivated more by closing the deal by the end of 2005
to ensure a high valuation. The process involving
international bidders was stopped before a request for bid
was published, dispelling any concern that the GoJ had
violated a good faith initiative with bidders, he added.
According to Abu-Hammour, involving international bidders
would not necessarily have netted the GoJ a higher price for
the sale, but would have guaranteed that the process would be
delayed considerably as all offers were evaluated.
Abu-Hammour added that with a "new Saudi phosphate-fertilizer
company coming on-line in 2008," the value of JPMC would
decline. Hence, the need to move quickly on the transaction.


7. (C) Above all else, GoJ officials indicate, the King's
decision to foster a strong investment relationship with the
Sultan of Brunei was the primary driver of the 37% sale of
JPMC (This point was made by the King to the Ambassador when
this deal was first discussed, in the fall of 2004).
Abu-Hammour cited BIA's investment in JPMC as its first in
the Middle East, and a potential huge boon for future
investments. A great price, retention of employees, and veto
power for the GoJ were additional gestures that BIA was more
than willing to concede to, said Abu-Hammour. GoJ Spokesman
Nasser Judeh concurred, telling EconOff on March 16 that this
transaction allowed the Sultan to "slip money into Jordan's
pocket," a positive development the King "should be credited
for facilitating."

PUBLIC AND PARLIAMENTARY OPPOSITION TO SALE
--------------


8. (C) Many in the public and parliament spoke negatively of
the sale, complaining of a low-sale price and the surprise
nature in which the government had conducted the deal. Asked
why the GoJ had not done more to sell the public and
parliament on the sale before announcing it, Abu-Hammour
cited legal regulations that do not require the Cabinet's
privatization council to do so, the sensitive nature of the
sale based on the decisions of higher principals, and
instruction from the previous PM to conclude the sale
quickly. While two MPs on the Finance Committee expressed
their opposition to the sale by submitting a letter of
complaint and walking out of parliament, Abu-Hammour believes
he was able to convince most others of the benefits of the
deal in a question- and-answer period held with MPs the week
of March 12. COMMENT: A few MPs have continued to question
the sale in private to PolOff, but do not plan to raise their
doubts further in public. END COMMENT. Additionally, the
press has stopped carrying stories of public opposition to
the sale.

OTHER INTERESTED PARTIES
--------------


9. (C) When pressed on why offers from other parties were not
considered, Abu-Hammour suggested that most would not make
much business sense. Where would companies from Tunisia and
Morocco (who also mine phosphate rock and were interested in
taking a stake in JPMC) cut production if world prices of the
raw material fell, he asked rhetorically. "Obviously in
Jordan," he replied, rationalizing why BIA, a company with no
background or interest in other phosphate companies, is a
good fit. In a discussion with EconOff on March 16, Indian
Ambassador to Jordan R. Dayakar disagreed, citing the
interest of Indian fertilizer companies in investing as a
means to meet growing demand for downstream products like
fertilizers. In his opinion, the GoJ had "not made a
strategically wise decision" in going with BIA because it had
no background in the business and would not see the value in
cultivating the production of high-end, downstream products.
Chairman of JPMC Mohammed Salin Bader Khan agreed that demand
for downstream products was growing in the Far East,
especially in India and China, but questioned whether
investment by a customer-oriented company would "bring any
value to JPMC."

FUTURE OF THE COMPANY
--------------


10. (C) Khan stressed that the future of the company depends
on how BIA plans to diversify the product line. He was
enthused that BIA was joining the board if it meant future
capital investments in the company and an accelerated plan to
diversify the product line by focusing on downstream
products. If JPMC focuses heavily on raw phosphate
extraction, "the national value is limited to cluster
businesses prone to cyclical prices," whereas a focus on
downstream commodities like fertilizers guarantees higher
profit margins and makes the "company immune to cyclical
downfalls," Khan said. He cited a growing market for
phosphate commodities in East Africa and the Far East as an
opportunity JPMC needs to seize. Whether BIA will capitalize
will be more clear when they submit a promised business plan
within six months.


11. (C) COMMENT: While the GoJ's failure to lay the public
groundwork for the sale of a high-profile national asset led
to public and parliamentary disapproval of the sale, in the
end, positive engagement with parliament helped push the sale
through. The bottom line, however, is that the GoJ received
a good price for the 37% stake, with a number of concessions
that should prevent backlash from JPMC employees. What
remains unknown is whether the sale will promote investment
in the development of downstream products of phosphate that
are in growing demand on the world market.


12. (U) Read all of Amman's Classified cable traffic at
http://cables.state.sgov.gov/ncddos/cable/cou ntry/JOR/
home.html.
HALE