Banque du Caire’s blockbuster IPO holds firm against EGX selloff

Banque du Caire (BdC) priced its IPO at the top of its range after institutional demand held up through Thursday’s EGX selloff. The state-owned lender set its price at EGP 5.30 a share after institutions covered the private placement 6x over, or 19.8x excluding the anchor investors, according to a disclosure to the EGX (pdf) that confirms earlier reports. Private-placement orders reached EGP 205.8 bn (c. USD 3.72 bn), the most any EGX IPO private tranche has drawn, BdC says in a separate statement (pdf). At EGP 34.55 bn (c. USD 625 mn), the private tranche is also the largest in the EGX’s IPO history, with both records measured in EGP terms, the statement adds.

The real test starts when the stock starts trading, banking analyst Hany Abou El Fotouh tells EnterpriseAM. The final price matches the EGP 5.30 fair value set by BdC’s independent financial advisor, Baker Tilly, he says, which means “the stock wasn’t offered at a discount to its estimated fair value. Any rise in its price after trading starts will need real demand from investors and enough liquidity in the market to support it.” Strong demand in the book doesn’t ensure the same once the price moves daily, he adds. With 95% of the offering going to institutions, how big investors behave and how much stock actually trades will drive the first sessions. “The IPO’s success is an important step, but what matters more is the stock’s success on the bourse,” Abou El Fotouh says.

Where the stock goes from there depends on demand and the EGP in Abou El Fotouh’s view. If the appetite in the book carries over after listing, backed by enough liquidity and a stable exchange rate, BdC could get off to a positive start. Otherwise, the early enthusiasm could cool, especially with pressure on the EGP and Egypt’s credit default swaps at around 357 bps, a level he says reflects higher external financing costs and weaker risk appetite.

SOUND SMART- The 19.8x figure gives a better read of open-market demand, but it measures that demand against a smaller pool. “The way coverage is calculated makes a big difference to how you read demand,” says Abou El Fotouh. “We can’t treat the two figures as giving the same picture, or read directly from them how much demand we’ll see after listing.” The anchors took a big slice of the book: by our math, the four foreign cornerstone funds and the IFC and the EBRD were allocated about three-quarters of the private placement, based on BdC’s coverage figures.

The DFIs’ money comes with strings attached: Each lender is in for USD 100 mn, conditional on the private offering closing. BdC has committed to tightening its governance, transparency, anti-corruption, and environmental and social policies to keep an adequate number of independent members on its board and to draw up a climate transition plan. Both lenders are locked in for set periods.

At EGP 5.30, Banque Misr’s upsized sale of 45% of BdC raises some EGP 36.37 bn (c. USD 658 mn), keeping it the largest EGX IPO in USD terms in at least five years. The final price values the whole bank at around EGP 80.83 bn (c. USD 1.46 bn), according to the statement.

The brokerages still see upside even at the top of the range. Arab African International Securities’ research unit puts BdC’s fair value at EGP 7.8 a share, c. 47% above the offer price. Ostoul is more conservative, valuing the bank at EGP 6.55 a share, or c. 24% above the offer price, while its bear case of EGP 5.05 implies around 5% downside. At the offer price, Ostoul has BdC at 4.6x trailing earnings, a slight premium to the 4.2x average for the 10 listed peers it tracks, but at 1.2x book value against the peer average of 1.3x.

Buyers also have safer places to earn a return: With the CBE’s overnight deposit rate at 19% against urban inflation of 13.9%, lower-risk savings products are still attractive, says Abou El Fotouh. So anyone buying into a new stock “will need to see a clear [upside]” to earn a decent return, “whether from the share’s rise or from future dividends,” he adds. BdC is targeting a 20-30% payout to shareholders while keeping its capital adequacy ratio at 18-22%.

Retail investors have until Wednesday, 28 October to subscribe at the final price. The public offering had drawn orders for 454 mn shares as of Thursday’s close, 1.3x the enlarged 343.1 mn-share tranche, a senior government official previously told us. Execution is set for 29 October, with BdC shares expected to start trading on 2 November, subject to regulatory approvals.

The price also sets the benchmark for whatever Banque Misr sells next: An IPO sets a market price, so later stakes can be sold at that price whenever the seller chooses, BdC CEO Hussein Abaza told us on EnterpriseAM’s Making It podcast. “The market will establish how good or bad the bank is,” he said. His model is CIB, which the National Bank of Egypt sold down through a series of public offerings.

Banque Misr won’t be testing that soon, though. It can’t sell more shares for a year after the offering closes without the bookrunners’ consent, and EGX rules lock up 51% of BdC for at least two years, allowing it to sell only c. 4% of the bank after the first year.

Why the price matters beyond the bank: The IPO proceeds go to Banque Misr, not the Treasury, but officials are counting on the sale to strengthen their hand in the IMF’s final review, which started on Sunday. The Fund wants about USD 1.5 bn in divestment proceeds before the program expires on 15 December, with close to USD 1 bn still to raise as of July.

The broader market is going the other way: The EGX30 fell 1.66% to 48.4k points yesterday after touching 47.9k intraday, its third straight losing session, according to market data. That followed a 3.56% drop on Sunday to its lowest since early April and a 3.41% slide on Thursday. Together, the three sessions have wiped some 8.4% off the index since Wednesday’s close, by our math. In USD terms, yesterday’s loss was steeper at 2.45% as the EGP slid. The benchmark is still up 15.75% this year, down from 22.6% in mid-October.

ADVISORS- CI Capital is the lead global coordinator and joint bookrunner on the offering. Our friends at EFG Hermes are joint global coordinator and joint bookrunner. Baker McKenzie is advising BdC and its parent on US and English law, while Helmy, Hamza & Partners, a Baker McKenzie member firm, is counsel on matters of Egyptian law. Enterprise Advisory serves as investor relations advisor.