TRANSACTION UPDATE- Eastern Company’s new Emirati shareholder will throw the company a USD 150 mn lifeline next year even as it finishes its payout to the Chemical Industries Holding Company (CIHC) — plus we have the inside track on what the state is presently aiming to do with proceeds from the transaction.

#1- Global Investment Holding (GIH) will provide Eastern with some USD 150 mn in hard currency next year to bolster the cigarette maker’s ability to source manufacturing inputs, a senior government official tells us. Eastern’s imports of raw materials have been hit by the FX crunch. GIH reportedly sees the facility as a key measure to ensure the profitability of its new investment. Eastern’s net income dropped 20% y-o-y in 1Q FY2023 to EGP 1.1 bn, while revenues fell 32.5% y-o-y to EGP 3.1 bn in the same period.

#2- CIHC will be paid additional installments equivalent to USD 94.8 mn next year, our source tells us. That will bring the total value of the transaction announced last Thursday to USD 625 mn, as agreed in September. The transaction makes GIH the largest holder of Eastern shares. News of the second installment was first reported by Al Borsa

#3- The government looks set to use the bulk of the proceeds from Thursday’s sale to invest in fresh capacity at existing state-owned fertilizer plants, our source said, with an eye to ramping up exports. It will use the rest of the cash to help narrow the budget deficit, our source added.

Who decides where the money goes? The ministries of finance and public enterprise are mulling that over now, but seem on track to invest in Delta Fertilizers, Semadco, and Kima, our source said, confirming previous reports in the domestic press.

Why? Fertilizer exports = reliable and consistent FX flows: Out of a total USD 51.6 bn in exports recorded in 2022, fertilizers accounted for USD 3.3 bn. Fertilizer exports are larger than our USD 2.5 bn export industry for ready-made garments, USD 2 bn exports of fresh fruits, and USD 1.8 bn exports of plastics.

By the numbers: The Public Enterprise Ministry aims to ramp up the production of the three factories to a combined 2 mn tons of fertilizer per year, our source said. Together, the three have capacities of just 800k tons right now, split between Kima (550k tons of fertilizer per year) and Semadco (250k tons). Operations at Delta Fertilizers are currently on hold, and the government plans to invest USD 350 mn in Delta over the next three years to bring it online again, our source explained. The Agriculture Ministry is set to purchase some 40% of the output to enable its plans to expand agricultural land in the country to nearly 3 mn acres.

Market reax: Eastern Company shares rose 0.2% to close at EGP 28.00 on Sunday.

BACKGROUND- The sale to GIH makes the Eastern transaction the Madbouly government’s largest single asset sale since it rebooted its privatization strategy earlier this year.

ADVISORS- Our friends at EFG Hermes advised GIH on the transaction and were also sole broker for its execution, they said in a statement (pdf).

Tags: