MEA circles Cyprus Airways
Middle East Airlines said it may bid for a stake in Cyprus Airways, the island’s loss-making airline. The Cypriot government approved a capital raise for the state-run airline and announced it would consider offers for the sale of an unspecified stake. Cyprus Airways, 70 percent owned by the government, said that it entered into a ‘code-share’ agreement, a type of aviation business arrangement, with MEA. “We feel there is real potential for us and we are studying it seriously,” said MEA Chairman Mohamad el-Hout. The acquisition would be the first time MEA invests in a foreign airline. A Greek newspaper has reported that another airline, Russia’s OAO Aeroflot, has shown interest in a stake and is holding talks with Cyprus Airways. Trading in the struggling carrier’s shares were suspended after the reports of a potential stake sale, but were reinstated after Cyprus Airways released a statement saying “so far no specific proposal has been tabled.” Cyprus Airways which has a market capitalization of $36 million, lost $39 million in the first half of 2011, the last available results. It also received $26 million in compensation from the government for costs caused by Turkey’s flight ban on Cypriot traffic. MEA currently enjoys a monopoly on all domestic outgoing passenger aircraft in Lebanon, which is due to expire this year.
IFC acquires stake in MedGulf
International Finance Corporation (IFC), a member of the World Bank Group, acquired 15 percent of Mediterranean & Gulf Insurance & Reinsurance (MedGulf), Lebanon’s largest insurance company, for $124 million. IFC, which provides financing for the private sector in developing countries, aims at helping MedGulf extend health and commercial risk insurance services to new Middle East and North Africa markets; in particular, the company is looking at Turkey, Egypt and Iraq. The MENA currently has one of the lowest rates of insurance coverage globally, with gross premiums standing at some 1 percent of regional gross domestic product. According to IFC, the share of the population aged 65 years and above is expected to more than triple by 2050, which will require an increase in health, life and pension insurance services. The United States gross premium rate stands at 9 percent and the European Union at 8 percent. “The partnership with IFC will help MedGulf grow its operational capabilities to extend security to people who would otherwise have limited means of coping with calamities,” said Lutfi al-Zein, chairman of Medgulf. In April 2011, the Lebanese firm LFZ Holding bought the remaining 49 percent of MedGulf it did not own from Saudi Oger, connected to the wealthy Hariri family, in a deal valued at $400 million.
Wage woes at the banks
Following the government’s recent wage hike decree, negotiations for the renewal of bank employees’ collective labor agreement have been thrown into turmoil. The contract, which expired in 2010 but is still being used as the basis for labor contracts in the sector, regulates relationships in the banking sector between the administration and the employees. The dispute centers around an article in the agreement which stipulates that, in addition to any wage increase by the government, all employees will receive an increase of 25 percent on their salary up to the point of the minimum wage. Previously the first bracket was set at 550,000 lira ($365) and has now risen to 675,000 lira ($478), meaning all employees will receive a raise of $111 dollars in addition to whatever increase they receive under the new wage hike decree. Banks, concerned about the hit to their profits following the application of this article, have informed the labor ministry and the Association of Banks in Lebanon (ABL) that they are not going to implement the article for employees on the third salary bracket (from 1.5 million lira upwards). “All the benefits of contract should continue until the renewal of the agreement and the Lebanese law did not put period or deadline for the negotiations,” said George Hajj, head of Union of Syndicates of Bank Employees. In a recent meeting orchestrated by the labor ministry, the ABL and the bank employees association agreed to renew the collective contract for now while identifying the key controversial articles to be addressed. The employees association has warned that failure to address these articles would oblige them to take escalatory steps such as sit-ins and demonstrations. The final outcome of the negotiations remains unclear as Executive goes to print.
M&A down in 2011
The value of merger and acquisitions deals completed in the Middle East and North Africa region dropped by 28 percent in 2011 to hit $31.7 billion, according to a recent report by accounting firm Ernst & Young, while at the same time the number of deals increased 4 percent to reach 416. “A larger number of deals at smaller valuations signifies that asset values across the region have taken a tumble in light of the lower regional economic growth and also the projections for future growth,” said Phil Gandier, MENA head of Transaction Advisory Services at Ernst & Young. The countries that enjoyed the largest percentage of deal value in the domestic space were the United Arab Emirates with $3.9 billion of total disclosed deal value, followed by Saudi Arabia at $2.8 billion and Kuwait at $1.1 billion. The sectors that witnessed the most M&A activity in 2011 were the diversified industrial products sector and the real estate sector. Only 11 percent of the 416 deals announced in the MENA region in 2011 were in the sovereign wealth fund and private equity space.
Anti-expansionary Zionists
In a bid to boost competition and improve affordable living standards, Israel is looking to break up some of the largest conglomerates in the country, partly blamed for the rising cost of basic goods, which lead to mass protests last summer. Israel’s 10 largest businesses hold just over 40 percent of the market value of public companies, according to the finance ministry, leaving the country with one of the highest concentrations of corporate power in the developed world. The main recommendations, which still need to be approved in the Knesset, Israeli’s parliament, include requiring holding companies to limit their tiers of subsidiaries. Companies will not be allowed to hold a financial firm with assets more than 40 billion shekels ($11 billion) or a non-financial company with more than 6 billion shekels ($1.6 billion). Companies should abide by the new rules within four years. Some of the most significant corporate reshaping that would have to occur as a result would be for Israel Discount Bank Group, one of Israel’s largest banks, to divest one of its key holdings such as Clal Insurance or Cellcom, Israel’s largest mobile phone operator. Private equity firm Apax Partners would also have to divest either food maker Tnuva or the Psagot brokerage.
Etisalat and Batelco exiting India
United Arab Emirates telecommunications operator Etisalat is shutting down operations in its Indian joint venture (JV) Etisalat DB (EDB) after India’s Supreme Court cancelled 122 licenses in the country amid a corruption inquiry. EDB has licenses in 15 of India’s 22 telecommunications zones and 1.7 million subscribers, ranking the operator 14th in a 15-operator market. Etisalat, which owns 45 percent of the JV, has written down $827 million related to EDB. The UAE operator had paid $900 million in 2008 for its stake in the emergent company, then called Swan Telecom, and said it invested more than $1 billion in the JV, renamed Etisalat DB. The UAE operator has launched legal proceedings against its Indian joint venture partners for fraud and misrepresentation in an attempt to recoup some of the losses. “Etisalat’s case is that it was induced in its investment in the company that was then Swan, without any disclosure of the matters that are now alleged to have occurred in connection with the obtaining of 2G licences by EDB,” Etisalat said in a statement. Bahrain Telecommunications Company (Batelco) has also seen its licenses in India revoked and is selling its 43 percent stake in its Indian subsidiary S Tel to its Indian partner for $175 million, the same price it had paid to acquire the business. Batelco said the sale would help it achieve double-digit growth in 2012.
Qatar interested in Oger Telecom
Qatar has approached Saudi Oger, owned by the Hariri family, for its 55 percent stake in Turk Telecom, one of the largest listed companies in Turkey with a market capitalization of $14 billion. If Qatar secures the Oger Telecom stake, it would also get Turk Telecom’s mobile unit Avea with a customer base of 12 million, as well as South Africa’s third largest operator Cell C, in which Oger holds a 75 percent stake. As Cell C is not listed, valuing the deal is not straightforward but the Turk Telecom stake alone would be worth at least $8.6 billion. Saudi Telecom (STC), which owns 35 percent of Oger Telecom, has a right of first refusal, the right to acquire the stake before it becomes available for sale, which could complicate the transaction. In addition to STC’s right of refusal, there are other challenges to the deal such as the requirement to make an offer to the minority shareholders of Turk Telecom if the stake sale occurs. Qatar’s sovereign wealth fund has been an aggressive investor across sectors and countries and has put money in high profile names such as German carmaker Porsche, football club Paris Saint-Germain and London’s luxury department store Harrods. Qatar is now keen on enhancing its presence in Turkey.
Moody’s and S&P on Lebanese banks
Credit rating agency Moody’s withdrew its rating on Bank of Beirut for its “own business reasons” and without stating whether it was requested by the bank itself. The rating was a D- standalone bank financial strength rating. Moody’s kept its rating unchanged on the three other banks covered, Bank Audi, Byblos Bank and BLOM Bank. Another rating agency, Standard & Poor’s, linked the upgrade of its ratings on the three Lebanese banks covered, Bank Audi, BLOM Bank and BankMed, to political stability in Lebanon and the implementation of structural reforms. It stated that the most important risk for the three banks covered is their high exposure to the sovereign debt, while noting that their ratings benefit from their solid financial position as reflected by strong liquidity and a rigid operating performance. BLOM Bank’s exposure to the sovereign debt stood at 5.2 times its common shareholders’ equity as of end of 2010, Bank Audi’s exposure stood at 4.2 times and BankMed’s at 4 times. The rating agency also noted that the capitalization level is moderate for Bank Audi and BLOM Bank and weak for BankMed.
