EGYPTIAN RETAIL CHAIN PRIVATIZATION GENERATES

UNCLAS CAIRO 001474 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/ELA, NEA/RA, AND EB/IDF USAID FOR ANE/MEA MCCLOUD USTR FOR SAUMS TREASURY FOR MILLS/NUGENT/PETERS COMMERCE FOR 4520/ITA/ANESA/TALAAT E.O. 12958: N/A TAGS: ECON EFIN EINV EIND EG SUBJECT: EGYPTIAN RETAIL CHAIN PRIVATIZATION GENERATES CONTROVERSY Sensitive but Unclassified. Please protect accordingly. ¶1. (SBU) Summary: The Nazif administration,s proposed sale of the Omar Effendi Company - a major retail chain founded in 1856 - to a private investor is generating intense debate over the company,s proper valuation. Conditions the administration has set, especially for the purpose of avoiding layoffs, have further complicated negotiations. However, the GOE is loath to let the privatization deal collapse for what would be an embarrassing third time. End summary. -------------- Retail landmark... or perennial headache? -------------- ¶2. (U) In July 2005, the Ministry of Investment (MOI)'s Holding Company for Trade announced it would sell Omar Effendi, an icon of Egyptian retailing, to an anchor investor or group of investors, later extending its bid deadline to October 2005. Negotiations are underway with the sole bidder, the Saudi Anwal Company, on the basis of a valuation of around LE 504.9 million (approximately $88.6 million), according to press reports. ¶3. (U) Over the last week, the press has accused the GOE of undervaluing Omar Effendi and squandering the value of a national symbol. According to the rumors, the GOE Holding Company for Trade formed a committee outside the normal valuation process and projected the retail chain was worth over LE 1 billion. The GOE, however, maintains that it followed standard valuation procedures, insists that the Saudi company's offer is actually 10% higher that the chain's true value, and points out that the valuation exceeds those made in earlier privatization offers for the company. ¶4. (U) The valuation issue is not the only impediment to completion of the deal. This is the third time the chain is up for sale; in connection with previous offers, in 1999 and again in 2001, the GOE was unable to reach agreement with bidders (all from Arab countries) due to Omar Effendi's huge payroll, antiquated retail methods, the poor condition of stores, and other problems. Overstaffing remains the biggest concern: despite efforts to improve investor interest through an offer of early retirement packages to employees in 2000, the number of employees - 6000 - is still almost double international retail staffing levels. ¶5. (SBU) The MOI's insistence on conditions for sale - in part, to assuage fears of a mass layoff - has further complicated matters. According to the terms, the buyer must agree to maintain 10% of the shares under the ownership of the holding company and must commit to preserving workers' rights and privileges under the status quo - i.e., remuneration, benefits, etc., under existing contracts - while an additional 10% of shares is to be reserved for employees at a discount. Minister of Investment Mohieldin has stated that an improved early retirement scheme will be available for workers, has ordered a three-month bonus be paid to employees, and has promised another six-month bonus after the contract is signed. -------------- Comment -------------- ¶6. (SBU) We assess that the MOI will push the sale through rather than allow it to collapse in the face of opposition; failure could undermine the GOE's efforts at privatization, making for unflattering comparisons between the Nazif administration and the predecessors that failed to sell Omar Effendi in 1999 and 2001. However, the MOI is contending with a formidable opposition: rumors abound that those responsible for the media campaign on the valuation issue are a wealthy, powerful, and ultimately corrupt lobby group of suppliers to public retail chains. This group profits by supplying the chains with low-quality goods at inflated prices; some also rent areas within the chains to sell their goods. Such suppliers stand to lose money when Omar Effendi's new private owners - and those of other retail chains that might go private, once a precedent is set - demand to pay fair market prices for inputs. End comment. RICCIARDONE