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.

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Retail landmark... or perennial headache?
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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.

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Comment
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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.
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