Business

In values we trust

by Thomas Schellen
written by Thomas Schellen

Even though it was founded 90 years ago in Egypt, is owned by a United Arab Emirates-based investment fund, and is being run by a Brit, much if not most of the DNA in regional retailer Spinneys is entwined with Lebanon. The chain was reborn in Beirut in 1998; of its four countries with direct operations, Lebanon leads in number of stores and sales revenue; it suffered some of its most unwelcome challenges in the local scene; and notably, it puts all its new ideas in front of the Lebanese consumer first, before taking them to the Egyptian, Jordanian and Qatari markets.

According to CEO Michael Wright, Spinneys is a niche player in Qatar and Jordan, while Lebanon and Egypt are the current centers for revenues and profits. The brand’s largest presence is in the UAE, where almost 50 supermarkets and convenience stores carry the Spinneys logo and identity, far more than in the four other countries together. However, the group has no direct stake in the UAE market since the operation there is owned by Emirati businessman Ali Albwardy and run independently from the group under a basic franchise agreement.

Group-wide sales revenues, which do not include the UAE, were in the vicinity of $500 million in the group’s 2012/13 financial year, which ended last June, Wright told Executive in a far-ranging interview. He said Lebanon accounted for 45 to 50 percent of that, which suggests a turnover of somewhere between $200 and $275 million for the operation here, depending on whether the corner values cited by Wright were on the high or low side.
He competes in Lebanon against several domestically owned supermarket chains along with the Kuwaiti-owned Sultan Group and Carrefour, the French chain whose regional partner is the Majid Al Futtaim Group. For market share, Lebanon is Spinney’s main focus but these growth potentials are curtailed by the overall structure of the retail trade.

Evolution of ownership
In the first years after players like Spinneys rolled out super- and hypermarkets, there were strong expectations that these big stores would wipe out local stores but this has not happened in Lebanon. Large retailers with centralized buying and modern management control only around 30 percent of the Lebanese market and this number has been rather stable, Wright said. The retailer plans to increase the total number of stores from the current eight to 13 and also venture into the convenience store business in a repeat attempt at the local diversification plans that Wright first disclosed to Executive almost ten years ago.
Part of the retail brand’s story is a complicated ownership evolution whose recent chapters center on one of the region’s leading private equity players, Arif Naqvi, who is best known today as chairman of Abraaj Group. His older company, Cupola Investment acquired Spinneys in 1999 along with other assets for $116 million, in Naqvi’s first major deal from the United Kingdom-based automotive distributor and retailer Inchcape. It spun off the minority interest it held in the UAE operation of Spinneys — presumably the group’s filet piece in operational terms at the time — by selling it to the local majority partner Albwardy Group and embarked on expanding the brand’s presence in Lebanon and from there into Egypt, Qatar and Jordan.

Describing the company as a regional pace setter and innovator in major retail, Wright — who has been with the company for 26 years, beginning in Dubai after a training scheme with a British retailer —said that competitors copied the retail environment and work and training structures of Spinneys since the current operational mold was implemented in Lebanon in 1998. Retail managers with experience at Spinneys are sought after in the market and can often achieve a career leap when hiring on with other retail chains.

In 2004, Spinneys was acquired by the first Abraaj Buyout Fund (ABOF) based on diligence from which Naqvi excused himself to avert conflict of interest issues, according to Wright who was for two years a direct employee of Abraaj. According to a Middle East Economic Digest research document reproduced on the Abraaj website, Cupola retained 35 percent ownership of Spinneys Group while 46 percent was taken on by ABOF for a cash consideration of $27.1 million. Ten years on, the group is still owned by the Abraaj Fund as controlling shareholder and is actually the oldest participation among 146 portfolio companies shown on the Abraaj Group website.

The future ownership of Spinneys has been rife with expectations that Abraaj would seek an exit from the investment. This is in no way surprising given the nature of the private equity business but the current indications are that an optimum exit opportunity will come after the group realizes further expansions and when its main asset bases in Egypt and Lebanon allow for better valuations on virtue of improved macroeconomic and political realities.

Spinneys’ expansion plans over the past 15 years are a story in themselves, reflecting the vagaries of an environment where many international retailers have paid with high losses for ventures that got trapped in culture conflicts or misunderstandings of different commercial languages. Over the years, the management has been liberally trumpeting plans to penetrate a bewildering number of markets from Kazakhstan to Morocco and sub-Saharan Africa. Plans for several countries, such as Morocco, could not be realized at the times that they were envisioned for but current projects for various equity and franchising formulas are in place for Libya, Kuwait, Nigeria, and under negotiations for Pakistan, Iran, Tunisia, Algeria and elsewhere.

According to Wright, Spinneys would be valued in the ballpark of a quarter billion dollars if the investors sought to exit today but could represent a much higher value if an exit comes at an optimal time. The current restraints are the higher risk perception of the Lebanese and Egyptian markets while the future potential would be due to its brand and management experience with creating and operating modern retail stores in multiple markets that are not easy to tackle from the outside.

On the operational side, the group banks on a wildly successful loyalty program as a core marketing engine. The points-based scheme offers rewards to loyal spenders and stores are visibly busier on “double point days” when the company entices customers with the prospect of extra progress in earning these rewards, which in the base loyalty program range from household items to small consumer electronics. These rewards are moreover so popular and customer preferences for them so unpredictable that stores often run out of them near the end of a rewards campaign, to the effect of Wright acknowledging that “the loyalty scheme’s success has created its own problems.”

Rewarding loyalty
“We are very happy with the way the program is going. Almost everybody [among large retail groups] has a loyalty scheme but very few loyalty schemes will deliver to consumers the gratification where multiple products are very much in reach,” Wright said. Not at all bashful about the need for retailers to be aggressive, he conceded that Spinneys uses the program to incentivize customers to buy products where the group can achieve higher margins than the razor-thin ones that generally characterize the retail trade in fast moving consumer goods.
Spinneys has transported the concept to Egypt and Jordan and will soon launch it in Qatar. However, the loyalty program here remains the most advanced and the retailer is currently working to develop it further to tailor its suggestive power to customer behaviors on specific product types, by for example offering extra points to wine lovers to make them do more of their shopping for this margin-rich palate pleaser at      the chain.

In other customer-facing matters, Spinneys has a policy to charge customers only the lower price if a product’s shelf price differs from the price shown at the cash register, a problem that is all too frequent in their stores. However, this policy is often not adhered to by store personnel, Wright admitted, saying that the company would do more to engrain policy-compliant behavior in staff members’ actual retail practices.

Courting controversy
But while notes from customers on flawed pricing or quality of products, along with service complaints, are parts of Wright’s daily diet delivered to him from all customer communication logged at the chain’s call center, these were nothing compared to the accusations leveled against the Lebanese operation and Wright personally in 2012 of paying below the minimum wage, of bullying dissenting employees and disrespecting employee rights.

In his interview with Executive, Wright refuted the accusations as baseless and originating from a handful of activists and political players with partisan support from one or two media outlets. Wright claimed that the company was complying with all its tax and social obligations and was audited regularly by the authorities.  “We may have been the only company that absolutely paid everything although it has a big workforce. We pay all the minimum wages, all the social security contributions, we pay additional medical care. We have always been and always wanted to be the preferred employer,” he said.

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Business

Stowing the rich

by Thomas Schellen
written by Thomas Schellen

The formula is intriguing from a commercial perspective and it has pizzaz: the Beirut Yacht Club, scheduled to operate for the next two months under a soft-opening formula and celebrate commencement of business with a formal launch in April, targets the upper crust of the resident business community with a concrete space for reveling, relaxing, and rubbing shoulders — the 14,000 square meter (sqm) Yacht Club building at the end of Zaitunay Bay development in the St. Georges Bay.

The property includes areas for members and their guests in the form of bars, restaurants, terraces, a library, pool, meeting and recreational rooms, plus 53 residential units, of which nine will be operated by the club as exclusive lodging facilities. Of the remaining 44 units, 11 have been sold and the others are for sale as serviced apartments at a range previously not found in the Lebanese market — prices per square meter range from $15,000 to $25,000, according to Farouk Kamal, chairman and general manager of Beirut Waterfront Development S.A.L., the company which owns and operates the project.
The market that a developer can address with such a product is clearly the high net-worth and ultra high net-worth community, or individuals and families in the top 10 percent — those who, globally, own 86 percent of the world’s wealth according to the 2013 Global Wealth Report by Credit Suisse. The segregation of this addressable market from the averagely heeled population is reflected in the access threshold of the Beirut Yacht Club. Enrollment in the club, which will be limited to 500 members and carries an initiation fee of $15,000 for an individual and $20,000 for a couple, is precondition for buying one of the club’s residences.

Kamal is positive about the prospects of finding buyers who will happily part from their cash in exchange for a flat which will cost around $3 million based on average unit size of 150 sqm and median sqm prices of $20,000. People have already shown “a lot of interest,” he says with ostentatious confidence that his target market will jump on the opportunity to procure an apartment which is priced off the local charts but comes “fully furnished” and with the entitlement to use the “4,000 square meters of club area attached to it.”

He admits, however, that the company cannot be sure about the Yacht Club’s performance in the coming summer and is basically keeping its fingers crossed in hopes for improvements in Beirut’s tourism and general security conditions so that the inaugural season will go well in terms of the venue’s usage for events, leisure and food and beverage offerings. A good market response in these areas will also be important for the attractiveness of the real estate. “We are selling club residences and people will appreciate the residence when the club is buzzing and active,” Kamal says.

Reaching the social stratosphere
Besides the knowledge that Beirut real estate prices tend to be extremely resilient against downward pressures, other incentives for investing in a Yacht Club residence include the option to have the management short-let a unit on behalf of the owner. And of course, owners can circulate through the club basking in the feeling that they actually own a piece of the place, in contrast to the 90 percent of their fellow club members who will at least have to cross the street to get home — if they reside in one of the nearby residential structures of the Beirut downtown. Kamal sees a natural reservoir for Yacht Club membership in the district’s population of bankers, high-powered consultants and other business leaders to whom he wants to offer a community environment whose members “want to enjoy a certain level of exclusivity and at the same time rub shoulders with the right people.”

Adding a further dash of reputation, the Beirut Yacht Club might offer honorary one-year membership to select ambassadors countries whose embassies are the most active in Lebanon. Beyond the paying members, diplomatic elites and their guests, however, the club will not welcome the public to revel on its premises. This restriction to a wealthy and minuscule part of the population is perceived by critics of the project as flying in the face of the land reclamation that created the land on which the Beirut Yacht Club and the adjacent Zaitunay Bay hospitality area have been constructed.

The controversy over the transfer of these reclaimed parcels to the private sector — meaning Solidere, the company mandated with the reconstruction and development of the Beirut downtown — has roots in the 1990s that relate to the case of the St. Georges Hotel and the reclamation of land for the New Beirut Waterfront of which Zaitunay Bay is but a tiny part. A reverberation of the old confrontation recently rung through the media by way of a very public altercation between caretaker finance minister Mohammed Safadi and caretaker public works and transport minister Ghazi Aridi. In an exchange of accusations, Aridi asked Safadi if he was a “thief” and also claimed that the construction of an elevated walkway in Zaitunay Bay was illegal.

The Zaitunay Bay project and its managing company are a 50-50 joint venture of Solidere and Stow Group. As Kamal confirms, Safadi is the main shareholder in Stow Group, a real estate and investment holding with interests in the United Kingdom, Lebanon, and Oman. Besides heading Beirut Waterfront Development, Kamal is also the executive chairman and a shareholder of the group’s Stow Capital Partners.

Big fuss over a small construction

On the face of it, the argument over a building violation in Zaitunay Bay is focused on a technicality. The absence of a required decree does not put into question the legitimacy of the land’s allocation for private ownership and the construction is not a recent alteration of building plans or anything such. The 10-year-old original design for the project shows the disputed walkway leading up to the roof of the Yacht Club as terminating point (with exceptional sea view) of a promenade for broad public access.

From the perspective of its use value, the private ownership of Zaitunay Bay’s existing marina-side boardwalk and its upper promenade has caused some restrictions on activities such as skateboarding. From the area’s design point of view, on the other hand, the extension of the promenade has a consistent appeal and from the perspective of balancing the recreational interests of restaurant goers, skateboarders and so on, finding a solution appears to be a matter typical for community arbitration rather than cabinet-level action.
Much more interesting, albeit in hindsight, is the question of how the public interest was represented at the time when Solidere and Stow first forged their partnership. Solidere’s 2012 Annual Report contains an elaborate narration and an impressive pictorial on the downtown’s development that far outshines the report’s financial pages. This narration states as a fact that the two companies formed a joint venture to whose capital Solidere contributed 22,350 sqm of land with permission for 20,000 sqm of built-up area while Stow contributed $31.6 million in cash.

The report’s financial pages specify further that the joint venture was formed in February 2004 with an initial capital of $19,900 and that the partners increased this capital in 2006 by $12.8 million and that Solidere sold “properties with an aggregate cost of $10.1 million… to the joint venture for a total consideration of $31.6 million” against which Stow contributed the equivalent cash amount.

Not explained is how the partnership was agreed upon and if there were competitors for entering a deal with Solidere to develop what are today Zaitunay Bay and the Beirut Yacht Club.

What can be said is that Stow Group, whose founders in 1985 included both Safadi and Kamal, has a visible propensity to collaborate with leading companies. The company says on its website that it is engaged in three “principal industry relationships.” Solidere is identified as a principal partner and so are TAG Aviation, with whom Stow has shared interests in the UK’s Farnborough Airport and Grosvenor.

The latter partnership means that Stow enjoys a strong business link with a company that is not only one of the longest-standing property owners in the posh Mayfair and Belgravia districts of the UK capital but also represents the business interests of the richest man in the country, Gerald Grosvenor, Duke of Westminster.

Stow’s projects in London in several ways give a very different impression from its more adventurous projects in Beirut. For example, an office project in Mayfair was not only blended marvelously into its street’s architectural context but its recent delivery was “on programme” and in line with what the company had said in a 2010 press release. In Lebanon, the congruence between targeted project completion dates and actual deliveries was nil.
If they say anything beyond highlighting that Beirut is not your usual market for projects and developments, the implications of Stow’s UK partnerships and track record may be that the company is  both keen on rubbing shoulders with the most potent partners it can find, eager to abide by its contractual obligations, and very much at home in the peculiar segment of the property market where a square meter price of $25,000 is not absolute record material (in 2012, Stow UK put a 870 sqm London townhouse up for sale with an asking price of GBP 17.5 million — about $27 million at the time and in excess of $31,000 per sqm).

A Bay on course?
In Lebanon’s feeble relationship between public and private spaces, the corner that Zaitunay Bay represents in a long shoreline of atrocious vistas interspersed with a few bearable developments is definitely more accessible, more appreciable, and better developed than some of its equivalents.

The hospitality project has lost some of its initial — and quite overbearing — snobbishness during the 2012/13 downturn of tourism and in a somewhat surprising statement, Kamal today emphasizes that “we know that for a project to be successful in Lebanon, whether it is a yacht club or a strip of restaurants, you need to depend on the local people, the middle class professional people. This is because if you are successful with them, tourists will come to that place. But if it is only tourists that come here, the locals will probably not come.”

The hospitality mix in Zaitunay Bay in January 2014 evidences a stronger orientation toward the locals and their tastes and pocket books when compared with the area’s initial tone. According to Kamal, the project owners steered the development partially away from the concept’s very first ambition of creating quality public space. He says they did so out of fears that this space could be abused.

It remains to be seen which course the Yacht Club will steer in the coming years, noting that nothing much in Lebanon ever comes out as planned or expected. But in a sense, the hyper-luxury orientation of the area is not actually new. Some 50 years back, in a period which older nostalgic socialites still like to call Lebanon’s golden era, the hospitality properties in this very neighborhood were the places where the elite sipped teas and aperitifs or smoked cigars in presumed splendid isolation from the squalor of the masses.

The question to be answered in the coming years in Zaitunay Bay, the whole New Waterfront and indeed the entire downtown is whether the necessary profit orientation of a private sector stakeholder is able to put enough emphasis on the social profits of well-managed public space, serving both public and private interests in reasonable balance.

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Business

A blossoming business

by Nabila Rahhal
written by Nabila Rahhal

It started out as a fun opportunity but became a real business,” says Mazen Maroun of Lotus Management Group, the hospitality development company which he and his brother Samer founded in 2003 with the launch of a sushi delivery service from La Gondole, their family owned pastry shop in Mar Elias.

Ten years later, it has indeed become a solid business with 300 employees and two successful restaurant chains, Japanese restaurant Soto and Olio pizzeria, with six branches of each spread across Lebanon. Toward the end of 2013 — despite the instability in the country — the brothers launched a new restaurant, Prune, in one of the side streets of Mar Mkhayel, Beirut, which they perceive as a new challenge for their skills in the business.
Their operations began with the concept of high quality, fresh, yet affordable sushi. “At that time, there were only a few and very expensive sushi venues in Lebanon and so we wanted to make it more accessible for everyone,” says Samer Maroun. For eight months, they tested the market through a delivery service launched from La Gondole. Mazen recalls how much attention they paid to the details — clean and neat packaging was as vital as having fresh and safe sushi at an affordable price — all of which created a trustworthy image for Soto — whose average delivery bill is now approximately $32 — when they opened their first venue in Gemmayze at the end of 2003. Two years later, they launched the first Olio right next door, and the company has been expanding and adding branches at an average pace of two venues every two years ever since.

The concept of good quality food at affordable rates resonated with the Lebanese consumer who cannot always afford high-end dining yet appreciates a good meal. It is also a concept that allowed the brothers to keep expanding — reinvesting revenues generated from the preceding venues into their next projects — with no partners to their company save for their venues in Dbayeh and Kaslik.

Although home delivery remains a viable aspect of their operations — accounting for 30 percent of orders — the business has shifted toward the onsite service, with Soto witnessing a yearly footfall of 220,000 and Olio 290,000. At its best performance, Soto serves more than 2.5 tons of fresh fish per month and Olio serves 1.4 tons of mozzarella, both indicators the company uses to illustrate its success.

Lotus Management Group had one misguided venture into Chinese cuisine in 2006, opening a Chinese restaurant in Gemmayze one day before the outbreak of the July 2006 war. The restaurant remained in operation for a year but was later sacrificed to maintain Soto and Olio, according to Samer. “For Chinese food to be [viable], as all our venues are, the average bill has to be between $40 and $50 and the Lebanese are not used to paying this much for Chinese,” rationalizes Mazen.

But despite their successes, the company was not immune to the same challenges faced across the economy in 2013 — making it the worst year in its 10 years of operation, according to Mazen, with a 65 percent drop in sales compared to 2012.

Even though the year started out well — and even outperformed 2012 in the first four months — it ended badly, with only the Gemmayze venues reporting a growth from the previous year. “Economically the year was a disaster but we are not thinking of closing anything: we were living abroad but came back because we believe in the country. Having said that, if [the situation] stays like this for four, five years down the line then who knows? We are still developing and expanding, but cautiously, instead of opening aggressively and creating even more business opportunities,” says Mazen.

Beyond lebanon
Expansion is still on the group’s mind, both domestically and globally. In line with the recent trend in the Lebanese hospitality business, Lotus Management Group is looking to franchise Olio and Soto abroad but is determined to find the right partner with which to do so. “There is a lot of interest but it is not as easy as it sounds because we are not looking just for the money. It is very easy to get capital but the right partner with the right background in the business and good PR is hard to find,” says Mazen. The brothers don’t have a specific region in mind and say they will go with whichever country provides them with the right opportunity.
Domestically, the Marouns have developed a new $300,000 investment in French bistro Prune, born out of Samer’s love for French cuisine and their need for a fresh challenge. While Soto and Olio have a recognizable ‘chain-restaurant’ feel, Prune is meant to be cozier and is where the brothers say they find themselves.

“Olio and Soto are more for the public than for us and there is very little contact with the customer on our part. Prune is us and every detail, from the plate to the kitchen to the customer, is taken care of by us,” says Mazen.

One can immediately sense the warm urban spirit that differentiates Prune from Soto and Olio from the French chic décor — including the mechanic’s rack transformed into a wine display that greets you at the entrance, the sepia class photographs adorning the walls and the black bistro-like wooden chairs and leather couches — and the fact that one of the two brothers is always present to greet patrons as if they were old friends and to ensure they have a pleasant experience.

According to Mazen, the customer profile for Prune is “those who are between the ages of 25 and 65 and are well-travelled, cosmopolitan and appreciate a real and affordable bistro.” Though this describes the typical clientele in the area, Mazen believes they are lucky to be away from the bars on the main street. “It is a plus to be off Mar Mkhayel because usually in Lebanon, streets that blossom quickly attract those looking for easy money and they ruin it for the more established,” elaborates Mazen.

The menu, which includes French staples such as mussels, cassouleh and steaks, is signature Lotus Management Group in that it serves quality food at competitive prices, with the average bill at $50 per person including wine, reasonable relative to prices for French cuisine in the market.

A family affair
The venue has a seating capacity of 45 people and with a turnover of 2.5 tables per shift, the Marouns say they are satisfied with Prune’s performance taking in consideration the situation in the country.

When asked whether Prune will be up for local expansion or franchising, the brothers agreed that they don’t see that happening in the upcoming four years. “It’s not only the décor, it’s the spirit that will be hard to duplicate. Prune is here and only here for now,” says Samer.
Lotus Management Group is not resting on its laurels and is already finishing up construction of a gourmet sandwich shop with a small terrace appropriately called À Côté, as it is adjacent to Prune.

Meanwhile, due to a sentimental value, La Gondole — where it all started with their sushi home delivery operation — remains a base for their businesses and is where their main office and all the accounting, management and purchasing needs of the business are located. “We did not give it a push because my mom and dad consider it their raison d’etre; if we give it new management they will not have a role and we do not want that. We could have developed it to meet the area’s needs but we are enjoying our parents’ pleasure managing it,” says Mazen.

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Society

Downtown, where everything waits

by Nabila Rahhal
written by Nabila Rahhal

Walk into the Beirut Souks in downtown Beirut in the evening lately and there’s a noticeable buzz of activity that’s been long missed from the sometimes eerily quiet shopping area. The Beirut Souks Cinemacity is finally open and the Souks seem primed to receive the benefits.
The cinema is part of the second phase of Solidere’s original plan for the Souks area, explains Rami Ariss, land sales and real estate leasing division manager at Solidere, with the third and final phase being a department store which has been delayed due to “a few complications.”

It’s all in the design
The remaining part of the second phase is an entertainment center whose exterior structure is complete — and can be seen to the left side of the cinema complex — but whose concept is yet to be determined. “We are bidding for a concept but we decelerated work on it because we want something unique and distinguished. Also, we don’t want to open it in the uncertain times the country is facing and risk burning the concept,” explains Ariss, adding that the entertainment center should be open within a year but that for now Solidere is focusing on the new cinema. Solidere’s goal is to have the cinema be an anchor for the mall itself and increase overall footfall to the area.

Cinemacity, a partnership of Empire Cinemas and World Media Holding, a media company operating in the Middle East, collaborated with Solidere on the cinema. Both Empire and World Media Holding have their separate cinema-related operations in Lebanon and the region, with their first partnership being Cinemacity in Dora’s City Mall before moving on to the Beirut Souks.

The cinema is run and operated by Cinemacity with Solidere taking the role of both the landlord and a partner of the operating company.

Hammad Atassi, chairman and general manager of Beirut Souks Cinemacity, says over $25 million was invested into the project — “a big undertaking.” Solidere’s Ariss says that the company ensured no cost was spared to create something iconic that would be sustainable for many years to come. In fact, according to Ariss, one of the reasons for the delay in the theater’s opening date was that there were many details involving the aesthetics of the design to cover.

The multiplex stands apart from most cinema complexes in Lebanon, if only by nature of its size. While typical mall cinemas in Lebanon are 3,500 square meters, Beirut Souks Cinemacity — the only stand-alone multiplex in the country — spans 27,000 square meters and is the largest in the region.

The space is divided into 12 regular theaters and two VIP sections — with an 18 and half meter screen in two of the theaters. There are three food concession areas serving a variety of munchies ranging from typical cinema fare like popcorn and nachos to salads and sandwiches, as well as some shops on Allenby Street and a food court. Despite its size, the cinema does not have the most seats in the region, a trade-off,  Atassi says, for its comfort and aesthetics.

The project’s concept is based on visuals and vibrancy. The exterior architecture was created by Valode et Pistre and is enveloped in LED screens, visible from Allenby Street as one approaches the Souk area. The screen is part of the interactive façade of the cinema and displays ever-changing scenes, such as the Lebanese flag on Independence Day or various holiday images in December.

The interior was designed by Nabil Dada’s Dada and Associates, whose brief says they “worked in response to the distinctive external architecture of the cinema by modifying the internal volumes and seamlessly integrating cutting-edge technology into their design to create a young and vibrant atmosphere.” This is reflected by some interior features such as the vaulted ceiling lined with 256 LED screens and the 50 meter long corridor leading to the lower level theaters, with its projections of animations on both sides and the various uses of lights on the escalators and walkways to create moods within the structure. Aside from its design and technology, Beirut Souks Cinemacity’s location in downtown Beirut and the free use of the Beirut Souks parking for four hours also attract cinemagoers. “A city’s downtown is usually where the major cinemas are located and this was the case in Lebanon before the civil war, but not after it. This project was long overdue and deserves to get the kind of business it is getting now,” says Atassi.

A box office hit
The cinema’s performance has exceeded expectations and Atassi says that in his experience with other cinemas in Beirut new theaters in Lebanon usually take three to four months before they achieve their average ticket sales. Thanks to the project’s visibility, he continues, ticket sales at the Souks rapidly exceeded the 1,000 tickets daily margin and were closer to 3,000 a day, something that no new Lebanese cinema has achieved in such a short space of time. “We expect it to get a third of the share of the Lebanese box office shortly,” says Atassi.
December’s bombing in the downtown area adjacent to the Souks slowed admissions to 450 people but the number shot up to 1,700 the next night.

“Despite it having the same ticket price as other theaters in Lebanon [$8], the Beirut Souks Cinemacity is attracting high-end, mature customers who are drawn more to intellectual films than the latest adventure blockbusters,” says Atassi, adding that since they have so many theaters, they will be playing films for a longer time and also featuring independent films.
While it is too soon to tell whether the cinema has had any major impact on footfall in the Souks, Atassi tentatively attributes the increased activity and longer opening hours in the restaurants around the cinema to its presence. “It is difficult to tell if this is the usual holiday traffic for the Souks or an increase brought on by the cinemas. To be able to have a solid understanding of its impact on the Souks themselves, you need normal circumstances for the Souks. Now we will be able to see,” says Ariss.

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Society

Something to talk about

by Michele Azrak, Zeina Loutfi & Ramsay G. Najjar
written by Michele Azrak, Zeina Loutfi & Ramsay G. Najjar

The single biggest problem with communication is the illusion that it has taken place.” One could easily argue that in this statement George Bernard Shaw aptly described the affliction of the world of corporate communication for the longest time. Communication is the exchange of information between people. Yet most companies have left out the word exchange by talking at people instead of talking with them. In today’s increasingly connected world, the power lies in the hands of consumers, who are inducing change in the communication landscape by demanding less noise and more value. While this does not necessarily imply a drastic departure from what already exists, the coming years will surely see major improvements in how we use what we already have — knowledge, tools and platforms.
What is certain today is that this intrinsically complex communication landscape is forcing companies to look within and refocus on the value they have to offer for a new generation of consumers and stakeholders. Understanding where the future of communication lies is driving companies to improve experiences and relationships, and to do so it has become obvious that companies need to focus on delivering valuable content.

Content is still king
In the increasingly virtually vocal society in which we live, everyone has a voice and wants to use it. The amount of content being published online is growing exponentially; with so much competing for consumers’ attention, companies need to become more relevant and authentic in order to break through all the noise. For this, companies should favor the creation and distribution of valuable and compelling content over controlled messages and fabricated sales pitches. The primary intent of such a content-driven approach is to engage and build meaningful relationships with consumers, rather than to sell to them.

Whereas this approach has been around for a while, the focus had been on the quantity of content, with companies trying to publish as much content as frequently as possible. However, it has become clear that the future lies in quality-driven content. Companies should start creating content that educates, informs, inspires and entertains. This can be in the form of blog posts, newsletters, white papers, live presentations, podcasts, standard and micro-videos, and the list goes on.

There have been several success stories so far, with top global brands leading the pack. Last year, Coca-Cola made the news when it completely revamped its website and re-introduced it as an online magazine entitled the Coca-Cola Journey. It featured articles on entertainment, environment, health and sports, later adding food and music channels. The difference of course is that the content in that “magazine” is subjective, not objective: it is stories that favor Coca-Cola’s brands, products and interests. HSBC is also showing the way with its Global Connections website, which helps in the positioning of the bank as an authority on international business with in-depth articles and strategies for global businesses — rarely mentioning HSBC.

Coming to our part of the world, we have started to see local and regional companies begin to dabble in content creation and publishing, but these fledgling efforts remain far from really delivering brand-agnostic content that is seeded with inspiration and that covers topics customers deeply care about.  Though quality content creation is challenging and time-consuming,  it will allow companies to distance themselves from their competition, attract and maintain an audience, and create and sustain business opportunities.

A shift to more dynamic storytelling
It is important to highlight however that it is not enough to simply create interesting content and put it out there. Without a coherent story that brings together the content, one would just end up with more noise and confusion. The goal is to create a unified and coordinated experience for the audience, and to develop deeper emotional connections with them. This can only be done by storytelling, which should be the thread that links the content together across all channels.

Even then, not just any storytelling will do. The new reality we live in also means a shift from one-way storytelling to dynamic storytelling that factors in the consumers’ voice. Moving away from the traditional in-house generated stories, companies need to now focus on stories that spark a conversation with their consumers as well as encourage and make the most of consumer-generated stories. Following through with the Coca-Cola example, the company has established itself as the leader in storytelling, creating a whole stimulating world around the brand, with compelling stories that strongly involve consumers.

While companies in the region have started to listen to what is being said about their brands, there remains a long road ahead: they need to start having a conversation and get the audience involved in it.

Rethinking the landscape
As companies alter the way they communicate with consumers and increase their focus on content, they will need to rethink many of their channels. The most notable one would be their website, which should now adapt to a more consumer-focused philosophy and accentuate the brand’s story flow through design. Instead of being static, websites are starting to look more like magazine portals with greater focus on the content produced with combinations of rich articles, interviews, opinions, interactive functionality, visuals and videos. Soft drinks leaders such as Coca-Cola, Pepsi and Red Bull are setting the trend and their websites are worth checking out.

This does not mean that the main corporate sections such as investor information, executives’ biographies, and press releases are no longer present on the sites; these are just relegated to the sidelines. And this certainly does not imply that all companies should just stop what they are doing and jump on the bandwagon, especially the less established brands that will continue to need a more business-oriented website for some time to come. They could start with enriching their site with more pictures, sounds and videos, and most importantly thoroughly plan and understand the consumer’s journey through their website before diving into any redesign.

Furthermore, simply creating good content on a visually engaging website is not nearly enough as thousands of pieces of great content go unread every day. The challenge will also be for companies to focus on effectively getting their content outside of their website. They should understand how content spreads across the web and find ways to reach new prospects by amplifying great content through multiple channels. For example, Forbes provides a digital platform for sponsored content, but one that is high in quality and that answers to audiences’ needs. Companies like SAP, Merill Lynch and Microsoft have been writing and distributing thought leadership content that is as interesting as pieces written by reporters and knowledgeable contributors, and their content seems to be viewed for the same amount of time as editorial content.

Content-driven communication does not yield value solely to already established brands. While some companies may be restricted in terms of means or resources, no company is too small to experiment with this approach as long as it crafts a clear communication strategy, evaluates its performance, and makes changes along the way accordingly. With titles such as content marketing manager, director of content, or even chief content officer popping up more than ever before, companies in the years ahead will have to embrace content-focused communication as part of their overall communication strategy. They simply can’t afford to be content (pun intended) with staying on the sidelines in the content world we live in. You can only toe the water so long before you have to dive in headfirst.

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Comment

Uncoiling Iran

by Gareth Smith
written by Gareth Smith

Nothing raises the entrepreneurial juices like the smell of a new market. Last month’s implementation of November’s interim Geneva nuclear deal between Iran and the world powers alerted United States and European companies to the prospect that, sooner or later, sanctions will loosen and Iran will open up.
The business potential is immense. Income that could be generated from the world’s largest gas reserves, at 33.6 trillion cubic meters or 18 percent of the global total, and the fourth largest oil reserves, at 157 billion barrels or 9.4 percent of global reserves, would make the Iranians wealthy.

Lifting sanctions would make possible the 8 percent average annual growth rate envisaged in the Five Year Plan of 2010-15. Iran is like a pent-up spring, pushed back by US and European sanctions which in two years have halved oil exports and obstructed access to both insurance and dollar markets, as well as by older sanctions that stymied the development of gas reserves. The economy contracted 5.6 percent in 2012 and 3 percent in 2013, according to the Economist Intelligence Unit.

But the spring is starting to uncoil. Since November, the clearest excitement has been among car manufacturers, specifically mentioned in the interim Geneva agreement. Peugeot and Renault have led the way, with past experience working with Iranian producers Khodro and Saipa, and envision taking Iran’s annual vehicle production back from 2013’s 385,000 to the peak of 1.6 million reached in 2011.

The agreement also included facilitating financial channels for humanitarian trade, including medicines. Pharmaceutical companies are keen to tap into a market that analysts put at $3 billion annually with 30 percent imports. Germany’s Merck is looking for local manufacturers to co-produce two of its medicines. The French Sanofil, which licenses products to an Iranian manufacturer, is planning new product launches to improve last year’s $3.7 million profit on sales of $10.2 million.

The ‘little Satan’ will not be left behind. British exports to Iran plunged 68.2 percent from 2005 to 2011, the largest fall among leading European Union countries, but during last month’s visit of parliamentarians to Tehran, Lord Lamont, chairman of the British-Iranian Chamber of Commerce and former chancellor of the exchequer, said British pharmaceutical companies and vehicle manufacturers were among those very interested in Iran.

Such companies selling in Iran, or investing in joint production, will have consequences for the country. In the longer term a return to high economic growth, coupled with substantial outside investment, may well transform it. Firstly, high growth and ‘opening up’ imply economic liberalization. Thus far, privatization has been muted and often involved transferring shares to quasi-state bodies or pension funds. This reflects the absence of foreign investment and shortage of domestic private-sector capital. But the 2006 decision by the Ayatollah Khamenei to back privatization of most state-owned industry is compatible with vibrant private banking, more effective capital markets and wider foreign investment.

Secondly, high economic growth is likely to increase Iranians’ expectations for material goods and better job opportunities, especially among the 35 percent of the 77 million population aged 15 ­to 29, the highest proportion recorded worldwide.  Growth may also encourage aspirations for greater social or political freedoms. In all cases, managing expectations will pose a challenge for the leaders of the Islamic Republic. After all, economic growth was high, albeit uneven across sectors, under the Shah prior to 1979.

Thirdly are implications for energy markets. Even a short-term, limited increase in oil exports — given a likely lower OPEC output in 2014, projected to drop 500,000 barrels a day by the US’s Energy Information Administration — implies other OPEC members, notably Saudi Arabia, will be cutting back. Fourthly, are political implications, in central and south Asia, and the Middle East. Supplying energy and simply being richer will enhance Iran’s influence — posing a greater challenge for opponents and critics so far unwilling to accept what the Iranian leadership sees as its legitimate role as a regional power.

Should this be seen as a disaster? Greater trade — especially alongside educational exchanges, more travel for businesspeople and simple citizens — may not just break down barriers set by sanctions. It may enmesh Iran more closely in the outside world, giving all parties more incentives to resolve disputes diplomatically. A more open, richer Iran may be more at peace with the world.

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Finance

The right kind of business

by Thomas Schellen
written by Thomas Schellen

Two niche markets are driving the business and growth of Jammal Trust Bank (JTB) at the start of 2014. One is in the bank’s home base in Lebanon and the other in West Africa. This diversification is not bad for a medium-sized lender that feels very comfortable being a mid-sized operator with just under $1 billion in assets — but what is surprising is that these two niches are at first sight entirely unconnected and even appear to represent opposite poles of core banking competencies.

In Africa, JTB’s market comprises primarily the expatriate Lebanese business community “in every country that borders the Atlantic starting from Angola and all the way up to Dakar [Senegal]. We are present in these countries in the sense that we have clients there who are basically larger-end clients,” says Anwar Jammal, JTB’s chairman and general manager.
In Lebanon, his clientele is far from big-ticket accounts and corporate transactions. Here, Jammal describes himself as banker of the small and medium enterprise (SME) clientele and JTB as a specialist bank in the much-neglected business of micro-lending, which not only in Lebanon is of no particular interest to the biggest banks. “We cater to SMEs and micro-businesses and in fact were the first bank to initiate micro-lending in Lebanon back in 1999,” he says, differentiating microcredit from small consumer loans by its purpose.

best of both worlds
The common denominator behind the opposing specializations is market knowledge. With most members of his generation in the Jammal family born as Lebanese expatriates in Africa, he claims to have an edge over other Beirut-based banks that approach the market as outsiders.

In the domestic market, JTB nurtured its role to be the “people’s bank” and has developed its expertise in the behavior of small customers ever since conducting a study finding that 50 to 60 percent of the bankable Lebanese population did not bank with anyone. From this study, which according to Jammal was done more than 10 years prior, JTB concluded that it would not try to chase a very small slice of the Lebanese market for large corporate accounts but rather focus on cultivating a clientele among the unbanked population and specifically target those 30 to 35 percent of bankable Lebanese citizens who thought that no bank would be interested to take them on as clients.

The strategy of the two niches has rewarded JTB nicely, with appreciable growth in the past few years. Partial banking sector figures for 2013 up to the month of November have shown JTB with growth across key indicators: seen year-on-year, assets expanded 27.4 percent, deposits grew 20.5 percent and lending increased by just under 27 percent. Net profits shot up tremendously, by 182 percent, but this has to be attributed to a large drop in exceptional expenses from the same period in the previous year, Jammal tells Executive.

While full-year results for the Lebanese banking sector in 2013 were not yet available at the time of the interview with JTB, last year’s partial sector results retrospectively provide a nice frame for the bank’s 50th anniversary near the end of last year. In a wider look over JTB’s financial evolution over the period since Anwar Jammal assumed the bank’s chairmanship in May 2005, growth rates showed broad strength. “Our average yearly growth of loans from 2005 till last year is 19.4 percent, average growth of total assets is just under 11 percent and the average growth of deposits is about 13.4 percent,” he says, adding that this pace of development allowed JTB to move its ranking by size of assets up by about 10 positions since 2005, to 23rd or 24th place in the sector.

Notwithstanding the growth rates that JTB recorded since he assumed the chairmanship in family succession, Jammal insists that he made no fundamental changes. “I can’t say that I have done anything innovative. We basically streamlined ourselves and focused ourselves on our core banking business. We tried not to be anything other than what we are: a medium-sized bank and we cater to the SMEs of Lebanon.”

He appears, however, to be prone to understatement in a very British way. Moreover, besides its dual market focus there is a second combination of seeming contradictions in JTB’s corporate DNA that is linked to his chairmanship. Jammal is not only the bank’s chairman and general manager; he also is its controlling shareholder since 2005. But while this combination is as close to operational omnipotence as it can get for a banker, the heir of JTB explains that he instead created a new governance structure with a board whose members, apart from him, hold no executive positions in the bank.

“I gave full power to the board, believe it or not. When I took over the bank, the powers that the chairman general manager actually had were frightening. I said to myself we either come out of this particular cycle to have a professional institution or maintain a small family-run business mindset. The first decision was that we want to go into being a professional institution, so I rescinded most of the authorities that I had and gave to the board,” Jammal explains.

Looking forward to the coming years, he foresees no diminishing of demand for credit in Africa and expects that the bank’s lending growth abroad will be curtailed by central bank-set limits for lending in countries with lower sovereign ratings long before any slackening of demand from borrowers.

Demand from SME borrowers and micro-credit applicants in Lebanon is also not going to wane in Jammal’s expectation and he assesses this market segment as less likely than others to be impacted by the continuing economic challenges related to the Syrian crisis.
SME lending constitutes the bank’s most important domestic credit activity, with a total amount of LL74 billion ($49 million) in lending to SMEs in 2012, followed by housing loans at LL69 billion ($46 million) and corporate loans at LL67 billion ($45 million) and SME loans were also the fastest growing loan segment between 2011 and 2012, displaying a year-on-year growth of over 60 percent from LL46 billion ($30.5 million) in 2011.

just the right size
While Jammal says that micro-lending is actually less risky than consumer lending in terms of default, he concedes that dealing with this clientele, many of whom have never banked before, makes the credit business much more labor intensive, which is reflected in higher interest rates. While reluctant to divulge the premium in interest rates that his bank charges over common market rates in Lebanon, the JTB chairman is adamant to compare the bank’s loan offers to those of non-banking money lenders. He emphasizes that prior to JTB’s focusing on micro-lending, small borrowers had no alternative to dealing with loan sharks and their extortive interest charges.

For developing the micro-credit and SME credit business of JTB, Jammal says the bank has a strategy to lower costs by automating and streamlining delivery and at the same time attracting more borrowers. He adds that this two-pronged approach is supported by risk assessment processes that the bank has developed on the basis of its experience with borrowers and which enable the bank to calculate credit scores in the profiling of loan applicants.

While he is decidedly working for growing the business of JTB — and in the long term aims to dilute the family aspect in the bank’s shareholder base by bringing in new shareholders — Anwar Jammal is one Lebanese banker who wants to profitably remain situated in the upper tiers of the beta banks (with deposits between $500 million and $2 billion). To him, going alpha would mean losing the bank’s competitive edge. “For as long as I am chairman, I certainly don’t want JTB to be one of the top 10 banks in Lebanon,” he says.

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Finance

Jad Hatem – Q&A

by Executive Staff
written by Executive Staff

Jad Hatem is a partner at B.E.C.A. Hatem & Partners, one of Lebanon’s leading accounting firms. The company has around 500 clients, many of whom are due to file taxes online for the first time ever in 2014, after the Lebanese government introduced the system at the end of 2013. In coordination with the Ministry of Finance, B.E.C.A. have been helping prepare their clients through specific training programs.

E   What companies have to pay their taxes online this year?
For the year 2014, all the large companies will submit online but the smaller companies still do hard copies. In the coming years all companies will be obliged to pay online. For now the larger companies are paying VAT, completed on a quarterly basis, annual tax income and real estate taxes online.

E   How significant a difference can online taxes make for both the government and the companies?
I would say it is going to be a win-win situation. For the taxpayer it will be much easier to submit it on the web directly rather than a hard copy to be completed, signed and submitted to LibanPost — with the fees attached. For the Ministry of Finance it will be much easier. In the past they used to get hard copies from the LibanPost, scan it, enter the data into the system — now that won’t be necessary. So on both sides it will be beneficial.
Nevertheless, I am sure the first two years there will be complications — it is new, people don’t know how to do it, and there might be bugs in the system. Many accountants from an older generation are not familiar with IT and the internet. So it might be tough for them in the beginning but later on it will be much easier.

E   The government is aiming to get all companies to pay taxes online by 2015. Is that realistic?
It will be feasible as long as the large taxpayers’ scheme is successful this year. There is no reason why it can’t happen.

E   How well is the e-taxation system that was launched at the end of last year working?
We cannot judge yet, we don’t have feedback as the first quarter that has been submitted is this quarter. So the first test is now — the deadline was postponed till the end of January. It is too early to know. But what we can say so far is that people, companies and accountants are not well informed about how to proceed with this file.

E   So the potential problems are more to do with knowledge than the functioning of the system?
We don’t know yet how efficient the system will be but what we know at this stage is people are not aware how to do it. So we need to have workshops so taxpayers know how to succeed.

E   How have you been training your clients to avoid problems?
We carried out a three-hour briefing for over 100 of our clients to give them the knowledge to register online, get an access number, and complete the forms.
We had 140 attendees, all of them from our clients — the chief accountants.

E   Is three hours training enough to learn how to submit your tax forms online?
Yes, after three hours they should be able to register, to get online, to get the login and have 80 to 90 percent of the knowledge required to file their tax returns.

E   Are some businesses that you work with hesitant to go online?
There is hostility, mainly from the older generation, which has been doing it for decades. For them they don’t want to change but on the other hand it is not an option — this is how things are moving. Now those in big companies cannot do it offline any more, it is compulsory.

E   How many years behind is Lebanon in going online?
IT-wise and in terms of internet penetration, compared to Europe we are far behind. Lebanese are not very familiar — if you look at the statistics most of them are into social media but that is it, in terms of using the internet for e-payment, etc. Lebanese are still not used to paying for things online. But compared to other Arabic countries, excluding the UAE, we are not far behind.

E   Does auditing online make the system more transparent, thus potentially reducing corruption?
The information will be available much quicker, so as soon as you submit, the information will be available. In the past it was completed manually, then sent to the Ministry of Finance to be processed. All of this process took months but not any more. But the impact on transparency will be indirect.

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Leaders

Time for a government

by Executive Editors
written by Executive Editors

For the past 10 months, Lebanon has been without a government. The caretaker cabinet has proved completely incapable of responding to the country’s two major ongoing challenges — the influx of 900,000 Syrian refugees fleeing their country’s civil war and a striking downturn in security conditions. Since Christmas alone, Lebanon has seen four car bombs. The political void has also fed into wider inactivity; parliamentary elections have been missed, natural gas tenders repeatedly postponed.
The coming months will see challenges just as daunting. President Michel Sleiman is due to step down in May, while parliamentary elections are scheduled for November. Tenders for natural gas must move forward lest Lebanon risk losing the interest of international oil companies and any hope for energy independence or a balanced budget. Syrian refugees will continue to arrive in Lebanon, putting further strains on state infrastructure. And the rapidly deteriorating security situation demands a strong response by the army and Internal Security Forces, backed up by political consensus.

It is good that leaders seem close to announcing a new government with broad participation. Sleiman and prime minister-designate Tammam Salam have been doggedly pushing for a cabinet. The Future Movement and Hezbollah, protagonists in Lebanon’s most fraught political dispute, have signaled their willingness to share power. As Executive went to press, it appeared that only one card had yet to fall into place: Michel Aoun’s Free Patriotic Movement (FPM).

The party’s major demand is to keep its current portfolios of telecoms and energy. There is some merit in keeping ministries under the same management: often new ministers bring coteries of advisors and erase the painstaking work of their predecessors.
Similarly both Nicholas Sehnaoui and Gebran Bassil, respectively the caretaker ministers of telecoms and of energy and water, have been effective in their roles. The two are among the only ministers that can point to real accomplishments under the last government, the former improving the country’s (still slow) internet networks and the latter pushing forward the oil and gas bids.

But these are hardly good enough reasons to sign over entire ministries to specific political parties in perpetuity. Lebanon has a long history of building political fiefdoms, rather than functioning ministries. Indeed, Bassil’s comments in late January that it was important to keep the energy ministry under the control of Christians smacks of just the kind of self-serving feudalism that has long held the country back.

This thinking must not be tolerated. Sleiman and Salam should not let the FPM get in the way of the formation of new government. Hezbollah and Amal, the FPM’s major coalition partners, shouldn’t either. With weekly car bombs at home and a devastating war still raging next door, the stakes are simply too high.

There are more pressing issues  in Lebanon than telecoms or even energy. It is time for the FPM to apply its competence in these areas as well.

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Finance

Investment banking: Small sector in search of big deals

by Livia Murray
written by Livia Murray

The investment banking sector in Lebanon is staggeringly small. With Lebanon’s history of maintaining a strong financial sector despite periods of crisis, one would expect its finance professionals to be well-versed in the notoriously lucrative industry, which registered revenues of $76 billion globally in 2013. But as the Lebanese market shows, not all financial systems are endowed with the same opportunities. Revenues from investment banking in Lebanon are so marginal that an operation could not even sustain itself if it were to rely solely on investment banking income.

Identity crisis
To compensate for low revenues, institutions that do investment banking are forced to diversify their products. What are referred to as investment banks in Lebanon commonly delve into brokerage, wealth management, long and medium term deposits and lending, alongside their advisory and capital raising services. Though it borders on an identity crisis, this combination of services is feasible and even encouraged by the specialized banking license under which these banks operate.

“This is the model that works,” says Samir Taleb, founder and partner of financial institution Lucid Investment. “It’s the central bank license which allows both together and actually encourages both together.” This specialized bank license issued by Banque du Liban (BDL) gives a wide mandate to the banks for services in corporate finance and private banking.  A total of 17 banks are registered under this license.

Investment banking is still relatively new to Lebanon. As the newest pillar of FFA Private bank, it accounted for only 10 percent of their total revenues in 2013 according to its senior manager and head of investment banking Julien Khabbaz. Their investment banking division carries out corporate finance advisory to regional companies who want to sell, restructure, or carry out a merger or an acquisition, and provides fundraising on a project-by-project basis. With the bulk of their revenues stemming from brokerage and asset management, the money they raise mostly comes from a pool of investors who are clients of the private bank. FFA acquired the specialized banking license in 2007 and has a shareholder equity of $30 million.
Cedrus Invest Bank’s founder and CEO Raed Khoury estimates that a similar 10 percent of the bank’s total revenues stem from investment banking. Out of a total net income of $3 million for 2013, investment banking profits would stand at $300,000, with the lion’s share of the bank’s revenues coming from private banking and wealth management. Established in 2011, the bank has a total paid-up capital of $52 million.

The weak appetite for investment banking in Lebanon has caused investment bank subsidiaries of larger groups to derive a bulk of their investment banking activities from divisions of their parent companies. According to Credit Libanais Investment Bank’s head of corporate finance and economic research Fadlo Choueiri, a great part of the bank’s investment banking activities come from advisory work for the Credit Libanais Group, particularly as it added a number of branches in the Middle East and West Africa.
Blominvest Bank uses a similar model. With parent Blom Bank having branches across Qatar, Saudi Arabia and Jordan, whenever one of these branches identifies a company that needs investment banking services, they outsouce these services them to Blominvest where the manpower is. “Our role will be really to provide services for our subsidiaries outside of Lebanon because this is where the deals are,” Fadi Osseiran, general manager at Blominvest, says.

slim pickings
Investment bankers in Lebanon are forced to diversify their services or outsource because of the barren landscape for such activities in Lebanon. “You might wait two years and have no transactions,” says Lucid’s Taleb. The lack of companies willing to seek investment banking services explains the meager profits of investment banking, and the need for a backup plan. “Because when it dries up, it dries up,” says Khaled Zeidan, who works on the buy-side of deals as general manager of MedSecurities.

Those in the financial sector blame the family ownership structure of Lebanese companies as hampering investment banking activities. “They want to preserve their control and going public or opening up their capital is a much lengthier and difficult process,” says Osseiran. Business owners in Lebanon will opt for taking bank loans when they need capital over selling shares, which would dilute ownership.

Though scepticism is not undue for a sector that does not have the cleanest reputation, those in the industry point to the merits of financial services and advising for a company. “You have shareholders and partners to report to,” says Taleb. In juxtaposition with the family business structure which has a reputation for being shadowy and inefficient in their finances, opening up capital can lead to fiscal transparency and institutionalized management. “Investment funds will be fighting to get a meeting with you as a company to support you, possibly partnering with you, financing the company to expedite growth,” says George Azar, managing director at financial advisory firm GA consult.

Sourcing deals
If Lebanese investment bankers are having trouble sourcing their deals locally, the appetite for Lebanese investment banking services is only slightly better in the region. But sourcing deals from the outside is more difficult than keeping active on the local market because of competition from large regional and international banks. Those who have managed have had to find space in the market. “I believe we sit in a nice niche,” says FFA’s Khabbaz. “We’re kind of in the niche of deal size where you don’t have many investment banks working on that same field,” going for deals in the $5-$50 million range.

Nonetheless, Lebanese investment bankers are forced to look abroad. “In order to be financially solid, if you want to work only in investment banking, [you need] to have deals in the region,” says Khoury. Many of the mandates currently under control of Lebanese investment banks are from Lebanese companies abroad, as regional expansion is the preferred method of scaling for these companies. In 2013, Cedrus worked on acquisitions in the UAE’s insurance sector, Saudi Arabia’s healthcare sector, and Lebanon’s food and beverage sector, with tickets ranging from $5 million to $10 million per deal, as well as smaller advisory deals within Lebanon. They could not disclose the names of the companies because of non-disclosure agreements.

Lebanese investment banks can look at bigger deals by getting work from their parent bank’s regional subsidiaries. Blominvest is currently working on two advisory mandates for a Saudi plastics company at a size of $70-80 million and a Qatari construction company at a size of $300 million, thanks to Blom Bank’s branches in those countries. They raised $100 million in 2013 for investments abroad, $50-60 million of which went to Saudi Arabia, mostly in real estate.

The future
In spite of the current limitations, investment bankers are hopeful that the next couple of decades will see an increase in investment banking activities in Lebanon. “We’re going to see exits in the next few years, people that inherited that business and they don’t want it, or people who inherited and want to grow it or need new partners or cash injection or people that need restructuring or advisory on corporate governance,” says Khabbaz. New management opting to open their capital would give investment bankers the opportunity to structure and plan these exits.

Capitalization would also allow investment bankers to sink their teeth into larger deals. “As the Lebanese companies want to grow and become competitive in the region, they need to re-capitalize. So they might ask for investment banks to advise them how to increase their capital, and find them companies for acquisitions, etc,” says Khoury. “There are a lot of things that need to happen as naturally family businesses grow and become a size where they can be more institutionalized and have a future. Maybe someday we can see some of these companies be publicly listed,” says Khabbaz.

Besides the capitalization of family businesses, some of the major sectors of the economy are still public. Privatization of major sectors of the economy such as telecoms and a major airline would drive demand for investment banking services. “You couldn’t really kick off investment banking in a place where there the sectors of importance are not privatized,” says Osseiran. Investment bankers also see potential in sectors of the economy on the verge of being developed, such as oil and gas.

Capital markets:
no exit in sight
Though investment bankers see prospects in the future for investment banking deals, one of the lingering problems they will face are the underdeveloped capital markets. Very few companies are listed on the Beirut Stock Exchange. With real estate giant Solidere and a handful of banks taking up the majority of the market, it has not seen any new equity listings since the turn of the century.

Weak capital markets provide little exit strategy — dubbed by Zeidan as the “holy grail” of the industry — for investors to sell their shares in a company and capitalize on their gains. But the current political situation has lead to an undervaluation in the price of shares that dissuades investors from buying and companies from selling. “Investors are not willing to pay a premium over and above the book value of the share,” said Choueiri, who claimed that the price of listed shares fell from roughly three times the book value in 2008 to barely over parity today.

Political deadlock limits both investments in companies and the desire for companies to list, take capital injections, and expand, as today’s climate is far from ideal for initial public offerings (IPOs). Khabbaz admitted that some of their mandates for mergers and acquisitions ground to a halt in    2013 because of insecurities relating to the political situation. “They kind of stalled and froze just because people were reluctant to do deals, to execute, to invest, to buy each other out,”he says.

But political deadlock is not the only culprit for lack of deals and IPOs. A regulatory framework has been slow in implementation, despite the establishment of capital markets as early as the 1920s.

These regulations would establish minimum requirements for companies to list and be traded on the stock market that would increase the transparency and accountability to their shareholders.

With the relatively recent formation of the Capital Markets Authority, a regulatory body to oversee Lebanon’s capital markets in 2011, investment bankers are still dubious this will lead to real change any time soon. “We’ve been waiting 10-15 years on the making of it,”   says Osseiran. A high priority in every country that wants to develop serious capital markets, a regulatory agency is a must for a highly functioning and reliable trading environment. Though Lebanese investment bankers may see more deals in the next couple of years, it is important that this is paired with a regulatory framework to limit the potential risks in this industry.

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