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landmark sale
by rehab el-bakry
state department store chain omar effendi was sold
last month in a deal valued at almost le 1 billion. hady fahmy,
chairman of the holding company for trade, reveals the inner workings
of a deal that comes nearly a decade since the landmark retail chain
was first put on the block.
hady fahmy’s appointment as chairman of the holding company
for trade was as big a surprise for him as it was for his supporters
and detractors. after all, fahmy was unequivocally associated with
“big oil,” not irrigation suppliers and failing department
stores. “i’ve spent my entire career in the petroleum
sector, as have most of the members of my family. my father worked
in the sector, my brother [minister of petroleum sameh fahmy] works
in the sector, and even my son works in the sector. i reckon the
petroleum sector is [in our genes],” he chuckles.
it didn’t take long for fahmy to find his niche in the sector.
after graduating from cairo university’s faculty of commerce
in 1971 he served as an army communications specialist during the
1973 war. the young officer was then hired by the egyptian general
petroleum corporation (egpc), the company he would later steward.
in 1975, fahmy joined his father’s private oil company, which
represented international oil companies operating in egypt. “this
is where i first began to see the theories of commerce i learned
[in university] in practice,” he recalls. “nothing is
guaranteed when you’re a private sector company competing
with others for contracts. i think this was where everything began
to come together for me.”
over the next 20 years, fahmy held a number of positions in state
and private oil companies, including petrogas, egypt gas, mobil
oil, and finally, egpc. in 2000, then prime minister atef ebeid
appointed him chairman of egpc, a position he held for a little
over three years. in early 2004, ebeid reassigned him as the head
of the holding company for trade.
fahmy believes his appointment was as a result of egpc’s exceptional
performance under his management. “when i was first appointed
as chairman of egpc, our sales were around le 3.7 billion a year,”
he says. “i managed to bring our total annual sales to le
7.4 billion [by end of 2003].” he says the stunning year-on-year
sales increase demonstrated that he was not simply a petroleum man,
but a man who knew how to improve the business performance of a
company and how to increase profits.
fahmy’s management skills in the oil sector were undisputed.
but could he apply these skills to other sectors? it was no easy
task, he admits. “everything in the holding company was such
a mess, so much so that i wasn’t even sure where to start.”
the holding company for trade manages 15 affiliated companies working
in diverse, unrelated fields. fashion wear home co. (hannaux), for
instance, is a retailer of ready-made garments, while the egyptian
irrigation & drainage company specializes in the manufacture
and sale of irrigation equipment. “these were companies that
had very little to do with one another, but this was the content
of the portfolio when i first came in, so i took it as it is,”
fahmy says.
moreover, the holding company and its 15 affiliated companies lacked
any viable system by which fahmy, as chairman, could keep tabs on
what was actually going on in these companies. “this was a
company with no systems, a lot of debts, no investments for at least
10 years and, most of all, no strategy or concept of where these
companies were going and how to get them there,” explains
fahmy.
clearly, he had his work cut out for him. the first task at hand
was to gain a solid understanding of the detailed inner workings
of the holding company and its subsidiaries, identifying their financial
strengths and weaknesses. this information would be critical in
the holding company’s prime mission, improving the performance
of its 15 companies. “from the moment i came into this post,
i knew that the main role of the holding company was to implement
the national asset management strategy,” he says. “this
means that some of the affiliated companies would be sold, others
would be re-acquired by the government while others still would
be liquidated.”
few had heard of fahmy’s work until a controversy arose over
the attempted privatization of omar effendi, egypt’s biggest
chain of public department stores. four failed attempts to sell
the 150-year-old retail giant had cast long shadows on the country’s
privatization program and its ability to attract investors. new
interest in the iconic department store chain, first by a kuwaiti
firm, then later a saudi investor, catapulted fahmy into the media
spotlight. suddenly, everyone was a critic.
“i think that the reason that the privatization of omar effendi
brought in a lot more public and media criticism than any other
company on the privatization list is simply [because] there is a
sentimental connection between the public and omar effendi,”
he points out. “this is not a company that the public had
never heard of before or only read about in the paper when the privatization
process began. no. this is a chain of stores that almost every citizen
in this country has been to at one point or another. even if they
don’t shop there, they’ve seen it all over the country
at different stages in their life. so it made perfect sense that
the public would feel that they are personally affected by its privatization.”
moreover, he points out that while the government has been very
clear in its intentions to implement privatization as part of its
asset management program, critics of the process – who fear
layoffs and the under-valuation of state assets – have been
particularly vocal since 2005. omar effendi, he says, is a national
symbol, which makes it a rally point for the opponents of privatization.
“if i were in the opposition’s shoes, that’s exactly
what i would have done simply because of the public’s sentimental
attachment to the stores. but they’re not looking at the big
picture.”
the fact is, fahmy asserts, omar effendi is a national symbol of
a bygone era that has become a burden on the treasury. “people
keep referring to the fact that the chain made le 2 million in profit
last year. that might be true but when you put this figure into
the overall context of the performance of omar effendi for the past
10 or 15 years, you come to the conclusion that this is simply not
enough,” he says.
he argues that any apparent profit is purely on paper. if the chain
were to pay off its accumulated debt, estimated at nearly le 250
million, it would be deep in the red. it is estimated that the chain
owes le 50 million in back taxes alone. in addition, its grossly
overstaffed stores employ nearly 6,000 employees – which despite
their often meager wages represent an enormous payroll or, conversely,
early retirement severance package. the government has spent two
decades trying to resuscitate the ailing retailer, and failed. fahmy
believes the private sector is the chain’s only real chance.
earlier attempts to privatize omar effendi in the 1990s and early
2000s failed to attract buyers willing to meet the minimum valuation.
the government’s most recent effort began with the formation
of an independent committee in 2005 to appraise the retailer’s
assets and determine its market value. meanwhile, a separate oversight
committee consisting of the ministers of investment, labor, finance
and trade, as well as the chairman of the central bank and the holding
company for trade, was formed to monitor the appraisal process and
the approval of any bids placed.
the appraisal committee determined that omar effendi’s assets,
which include 82 branches, were worth a minimum of le 450 million.
“this means that we were authorized to approve any offer that
was made with this number as a minimum,” explains fahmy.
in july 2005, kuwaiti retail giant the sultan center offered le
300 million for the chain. while the bid was well below the minimum
set, fahmy says it was nonetheless considered. “the fact that
a bid was submitted meant there was serious interest. we had to
consider it simply because we knew this was the first concrete offer
in a while. besides... negotiations could be used to raise the total
price,” he explains.
but the bid was rejected altogether when saudi retailer anwal group
bid le 504.9 million last february. “through negotiations,
we managed to raise the bid to as high as le 654.9 million,”
says fahmy.
the public, whipped up by reactionaries in the media, voiced outrage
over the government’s plan to accept the bid. the media, particularly
the opposition press, argued that le 654.9 million was well below
the chain’s market value and that the only way the sale would
go through is if someone involved in the assessment process had
a vested interest in pushing the deal through. the allegations prompted
an investigation by the public prosecutor into the valuation of
the company and any potential conflicts of interest involving those
assessing the bid. no irregularities were found.
fahmy says the uproar over the pending sale was, in part, a result
of the public’s misunderstanding over both the bid details
and the chain’s value. he says le 654.9 million was simply
the cash component of anwal group’s offer. “the group
also committed to paying another le 50 million on behalf of the
government for voluntary early retirement packages for 1,200 employees,
another le 155 million to settle some of the chain’s debts
and to pump an additional le 200 million in investments in omar
effendi,” he says. “it also committed to establishing
a training center [at around le 15 million] for the remaining staff,
which the company stated it would allow government to use to train
its staff at other retail chains. this brought the actual price
to le 1 billion.”
negotiations for the sale of omar effendi to anwal group appeared
to be wrapping up, but just as the government was about to close
the book on the deal in august, an unusual letter showed up on fahmy’s
desk. in it, egyptian-born saudi businessman mohamed saeed el hanash
offered le 2 billion for the omar effendi chain, effectively doubling
the going price.
the bid was unusual in every way. firstly, it came almost two weeks
after the official closing of bids. secondly, it lacked the appropriate
documentation such as a letter of guarantee. and thirdly, when the
ministry contacted el hanash to come to egypt to meet with government
officials to discuss the bid in person, he never showed up for the
meetings. instead, he continued to correspond with officials by
mail and telephone, including a phone-in interview with fahmy broadcast
live on national television.
while fahmy suspected el hanash’s bid might just be an attempt
to thwart the sale, he felt he couldn’t ignore it. “the
offer was made long after the closing date for bids so technically
we weren’t supposed to entertain the offer at all. but, at
the same time, when someone is willing to pay up to two times the
highest offer for a company that obviously holds such sentimental
value for the egyptian public, and especially when you are dealing
with the public’s money, you have to give the person making
the offer the benefit of the doubt.”
fahmy decided to consider the offer and work on parallel tracks,
continuing the negotiations with anwal group, while giving el hanash
time to present a letter of guarantee. he never did. by mid-september
it became apparent that el hanash did not have the vast fortune
stashed away in european banks that he claimed. meanwhile, local
newspapers reported that the belgian bank that el hanash insisted
had issued a letter of guarantee on his behalf assured egyptian
authorities that they did not issue any such letter.
for all intents and purposes, the offer was dead in the water. the
momentum shifted back to anwal group, which kept its offer on the
table. negotiations concluded on september 25 when the holding company’s
general assembly met and accepted anwal’s bid. according to
the final agreement, the government will sell 90 percent of omar
effendi to the saudi company and retain 10 percent as insurance
that the new owner fulfills its commitments. anwal will pay le 589.5
million in cash plus its previously agreed-upon investments. it
has also agreed not to sell any of the chain’s stores deemed
of historic or architectural value.
the process has been arduous, says fahmy, but the experience has
provided invaluable lessons. “one of the things that we learned,
for instance, is that the private sector business leaders who generally
support the privatization process are not necessarily willing to
support the privatization of a chain like omar effendi.” the
reason, he explains, is that some private sector heavyweights stand
to gain far more from the chain remaining public, as the retail
giant typically buys their manufactured products at a premium price
then gives them a cut on the final sale price. in essence, they
get paid twice for their goods – a system unlikely to continue
under private ownership.
another lesson learned is the importance of keeping media channels
open. when it became apparent that privatization opponents were
using the media as a tool to rally public opinion against the sale
of omar effendi, fahmy recognized that a counter campaign was needed
to inform the public of the facts. at least then the public would
have both sides of the story and a chance to make an informed decision,
rather than just opinion built “solely on assumptions.”
nonetheless, it is unlikely that the privatization of other retail
chains, such as benziyon or sednaoui, will generate as much public
opposition, insists fahmy. omar effendi is epitomized by its flagship
branch on abdel aziz street, a historic landmark built in 1856.
its iconic status is deeply embedded in the public psyche and holds
deep sentimental value.
once the sale of omar effendi is wrapped up, fahmy may well disappear
from the media spotlight for a while. but that’s not to say
he won’t be busy. he explains that his attention will shift
to improving the operating efficiency and revenue flow of the 14
other public companies in his portfolio. “not all these companies
are slated for privatization simply because some of them are unlikely
to interest buyers while others are classified as strategic and
therefore should remain within the government portfolio,”
he says. “my role is to continue to develop the management
strategy of these companies.”
the biggest obstacle, he admits, is the public’s deep-rooted
suspicions. “i [wish] people [would] stop assuming that the
decisions we are making come as a result of some [sinister] motivation,”
he says. “i ask the public to trust us because ultimately,
we are all in this together. these difficult decisions would be
a lot easier to make if we had the support of the public.”
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