EFG-Hermes and CIIC consolidate

EFG-Hermes, Egypt’s leading investment bank and most active securities firm by volume traded on the Egyptian stock exchange, announced in a conference call today that it will be merging with Fleming-Commercial International Investment Company (CIIC).

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By  Massoud Derhally Published  July 9, 2001

EFG-Hermes, Egypt’s leading investment bank and most active securities firm by volume traded on the Egyptian stock exchange, announced in a conference call today that it will be merging with Fleming-Commercial International Investment Company (CIIC).

Two new members from Flemings CIIC will increase EFG-Hermes’ executive committee to eight. Managers of each of the securities brokerage, investment banking, asset management, and private equity lines of EFG-Hermes will remain unchanged, as will the brand name. “High redundancies are not expected from the acquisition of the investment banking business of Flemings CIIC” said Dr. Mohamed Taymour, the chairman of EFG-Hermes.

EFG will focus on investment banking, as it has traditionally been heavily dependent on revenues from that line of the business. CIIC Fleming will predominately be geared towards principal investments only. According to Hassan Heikal, managing director of investment banking at EFG Hermes, existing shareholder stakes will be diluted by 40% affecting among others, Citicorp’s International Finance Corporation, which invested $40 million in EFG Hermes in 1999 for a 20% stake in the finance house.

EFG-Hermes’ valuation has been in line with the financials of other Egyptian entities on a P/E basis. According to Taymour, the valuation of the new deal is in the ratio of 4 EFG-Hermes shares to 1 CIIC share. The proposed alliance with Flemings CIIC will result in an increase in the company’s capital by 265 million Egyptian pounds, with a total of 16,368, 128 shares, bringing the total number of shares to 41,074,010. The capital increase will be executed at 16.19 Egyptian pounds per share. The agreement should give EFG-Hermes 20% market share of Egypt’s brokerage industry, grow its margins from investment banking operations and sustain a market capitalisation of approximately $190 million.

When asked by ITP.net about possible devaluation of the Egyptian pound and how that may affect the operating strategy of the newly formed entity, Taymour affirmed that the Egyptian government has taken the right steps towards creating a healthy investment environment. In the medium term, Taymour said the firm would be expanding regionally with operations in the UAE, Jordan and as far as Algeria. Egypt’s national foreign debt has been declining consistently as a percentage of GDP and industry analysts view this as a positive development for the financial sector.

CIIC, a regional investment bank based in Cairo is active in corporate finance, brokerage, and asset management. Since the merger of investment banking operations between FLEMINGS, the British investment banking and brokerage house and the Egyptian Mansour Group, in 1999, CIIC and EFG-Hermes have been competing for market share.

No representatives from CIIC attended the conference, raising speculation that EFG is the dominant party in the proposed alliance. In any merger it is almost always the case that one of the respective parties will always come out stronger. However consolidation does have a positive effect as well. Organisations can lower overhead costs; reduce operational overlaps, even out the cost of investment in technology required to compete with international banks and benefit from economies of scale. “Consolidation is a perquisite to grow this market, we welcome announcements like this,” Mohammed Abdel Hadi, equity research analyst for the Middle East and North Africa at Merrill Lynch told ITP.net in a previous conversation.

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