CONTROVERSY OVER SALE OF EGYPTIAN AMERICAN BANK

UNCLAS SECTION 01 OF 02 CAIRO 000680

SIPDIS

SENSITIVE

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN EINV EG
SUBJECT: CONTROVERSY OVER SALE OF EGYPTIAN AMERICAN BANK

Sensitive but unclassified. Please protect accordingly.

--------------
Summary
--------------


1. (SBU) Calyon Bank of Egypt recently purchased all of the
GOE's shares in Egyptian American Bank (EAB),taking a
controlling interest in the small but profitable bank.
Shareholders immediately protested the sale, claiming that
it was not sufficiently transparent, and that the price per
share paid by Calyon was under market value. A further
controversy erupted when it was revealed that two members of
the new Nazif Cabinet were major shareholders in Calyon.
The GOE responded (and financial sector contacts confirmed)
that the price per share paid by Calyon was fair,
particularly as Calyon had agreed to abide by EAB's costly
personnel policies. The GOE also asserted that the two had
severed their management ties with Calyon before taking
public office. The episode highlights the challenges the
GOE faces as it pursues privatization, a concept that deeply
unpopular in Egypt. End summary.

--------------
CALYON GETS A DEAL...
--------------


2. (U) Calyon Corporate and Investment Bank, an Egypt-based
subsidiary of the French Credit Agricole Group, recently
purchased all of the GOE shares in EAB, a joint venture
subsidiary of the state-owned Bank of Alexandria (BOA). The
sale was a step in BOA's preparation for privatization,
which the GOE has said will take place by March. The sale
gave Calyon controlling interest in EAB, and prompted
protests from stockbrokers and EAB shareholders, who
questioned the selling price of LE 45 per share, lower than
the price per share offered by other prospective buyers and
lower than the LE 56.8 price per share on the Cairo and
Alexandria Stock Exchange (CASE) at the time of sale.
Shareholders also protested a perceived lack of transparency
regarding the bank's total market value and Calyon's plans
for the future of EAB. Some stock market experts went so
far as to call the sale invalid, due to lack of transparency
and suspicion of fraudulent practices.

--------------
BUT SO DOES THE GOE
--------------


3. (U) The GOE responded to the protests with various press
statements, including one from BOA that noted that the
actual acquisition price was LE 50 per share, from which LE
5 were reserved for the employee insurance fund. Although
the sale price per share was still below EAB's trading price
on the CASE, the GOE approved the sale after Calyon agreed
to abide by EAB's personnel policies and retain all
employees after the takeover in management. The GOE made
this a condition of the sale, fearing a repeat of last May's
Misr International Bank (MIBank) episode, in which 600
employees of MIBank resigned in protest when National
Societe Generale Bank (NSGB) purchased the bank and
converted all employees to NSGB's less lucrative
compensation plan.


4. (SBU) EAB Managing Director Roderick Richards confirmed
the above to ECPO Counselor, while noting that the
complaints that Calyon had paid below market value for EAB
reflected a misunderstanding of the market. Richards
pointed out that relatively few of EAB's shares were openly
traded (most being owned by the GOE via Bank of Alexandria).
Those shares traded at a low volume until news of the sale
approached, when volume increased and the market price
jumped, a jump that Richards argued did not accurately
reflect EAB's value. Indeed, Richards added, a discount
against a firm's book value is common when one bank buys
another, reflecting the discounted value of the purchased
bank's loan portfolio.

--------------
DID THE CABINET MEMBERS TOO?
--------------


5. (U) A further controversy erupted when it was revealed
that two members of the new Nazif Cabinet, Minister of
Transportation Mohamed Mansour and Minister of Housing Ahmed
Maghrabi, were major shareholders in Calyon. Mansour was
the former CEO of Calyon, and he and Maghrabi own
approximately 25% of the bank through their El Mansour-El
Maghrabi Company. The opposition press claimed that Mansour
possibly violated the Egyptian constitution, which states
that ministers may not hold other positions while in office.
According to the BOA press release, Mansour resigned from
his position as CEO of Calyon before taking office as
Minister of Transportation. During a meeting with visiting
Congressional staffers, Minister of Investment Mahmoud
Mohieldin affirmed that the ministers had severed their
private sector connections upon joining the GOE. Maghrabi
also held a press conference at which he asserted that El
Mansour-El Maghrabi Company did not interfere in Calyon's
management but was a shareholder like any other. In the
same conference, Mahmoud Abdel Latif, chairman of BOA, noted
that BOA made a huge profit on the sale, which would make
BOA's balance sheet more attractive when that bank is put on
the market, sometime in the next few months.

--------------
COMMENT
--------------


6. (SBU) Although this controversy is not likely to have
serious consequences, it was unwelcome publicity for Mansour
and Maghrabi, two members of the "reform wing" of the
Cabinet. It is also a reminder of the how unpopular the
concept of privatization is in Egypt. Members of parliament
have questioned the value of privatizing banks, or indeed
any public sector entities, that are supposedly running
efficiently and turning a profit for the GOE. The average
Egyptian is very ready to believe opposition accusations
that the privatization program does not benefit Egypt, but
only those in power. The episode demonstrates the
challenges the new Cabinet faces as it pursues an
increasingly aggressive privatization program and also tries
to persuade the public that it is sincere in fighting
corruption. End comment.