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Qatar Deal Leaves EFG Hermes In Limbo
Without the regulator's blessing, EFG has little option but to cut costs aggressively, writes Una Galani.
April 10, 2013 2:59 by Reuters
By Una Galani, Reuters
EFG Hermes is in a strategic limbo. The Middle East‘s top investment bank was to spin off part of its assets in a merger with Qatar‘s QInvest. The Egyptian regulator, though, appears reluctant to make a decision until accusations of corruption against the bank’s co-CEOs are resolved. With bankers betting the deal has been sunk by politics, EFG must now focus on closing the discount to the sum of its parts on its own.
The QInvest-EFG deal was driven by a desire to salvage as much value as possible from the bank following the uprising that precipitated the end of the Mubarak autocracy two years ago. The ties between EFG’s executives and the old regime have weighed heavily on the bank since. Its shares slumped 62 percent – almost three times the decline of the local index. Analysts estimate that EFG now trades at a discount of between 20 and 30 percent to the sum of its parts.
The bulk of EFG’s value is split between two disparate divisions. Its majority stake in commercial bank Credit Libanais, acquired in 2010, contributes roughly 62 percent of the group’s revenue. The investment bank brings in the remaining 38 percent. There are limited synergies between the two branches, but Credit Libanais’ stable business kept EFG profitable until the last quarter, when the Egyptian lender recorded a net loss. EFG also has a private equity unit and a minority stake in local real estate developer SODIC.
A breakup and sale of those assets would make sense if QInvest’s bid to buy the investment banking assets got a green light from the authorities. EFG did not exercise its option to buy a further 25 percent of Credit Libanais last year. Now, off loading a Lebanese bank at an attractive valuation may be hard, given the renewed political crisis in Beirut.
Without the regulator’s blessing, EFG has little option but to cut costs aggressively. The firm is well capitalised, with a debt-free balance sheet. The problem is that it will take time before the business outlook improves in Egypt. EFG has already cut its operating expenses 20 percent since the uprising. Keeping its independence will be a challenge.