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.