How do economic conditions affect valuation of companies set for IPO?

Fatma Salah
5 Min Read

The disagreement has increased recently over acquisition deals in the Egyptian market, some of which halted due to a disagreement over valuation of stocks, especially amid the appreciation of the dollar against the Egyptian pound.

This would raise concerns about valuing government offerings, whether in terms of direct deals to strategic investors, or public offerings on the Egyptian Exchange.

The Cabinet announced the offering of 32 companies for the first time on the stock exchange.

Madbouly confirmed at the time that the offering will take place during the current period until the end of the first quarter of the year 2024, and that companies will be offered in 18 sectors.

Another of these effects was the deal to sell Telecom Egypt’s share in Vodafone Egypt, in which it owns about 45%, which was halted due to a dispute over valuations.

Sources close to the deal said that the government intended to sell a stake ranging between 20-25%, with an assessment of between $1-1.25bn for that share.

The sources added to Daily News Egypt that the Qatar Investment Authority – the buying party is sticking to buying the full stake of 45%, but after the recent devaluation of the pound against the dollar, the Qataris stuck to the valuation of the 45% amounting to about $1.7bn, which caused the negotiations to stop.

The Central Bank made 3 devaluations of the local currency in March and October of last year and January of this year, as a result of which the Egyptian pound lost nearly half of its value.

The question shifts to the future of evaluating government companies that are the subject of offerings or deals in light of the fluctuation in the exchange rate and the current financial market conditions.

Saif Awni, the founder, vice-chairperson and managing director of Elite Financial Consulting, said that promotion is the secret word in upcoming government offerings, whether in direct deals or money market offerings.

Awni told Daily News Egypt that the valuation of the companies subject to the deals is directly related to the desire of the buyers, especially since it has the highest negotiating power in deals. As for government offerings in the money market, the government has the highest negotiating power.

He stressed that evaluations are not the problem with prospective theses, but the most important and strongest factor is the quality of promotion, and how to convince the investor of the company’s success story.

He pointed out that some investors may agree to buy at a price greater than the fair value if they are convinced of the value of the company and the future of its success.

He stressed that there are some challenges that cannot be overlooked and directly affect deals, the most important of which is the economic conditions the country is going through, and secondly, a challenge represented in the exchange rate of the pound against the dollar.

HSBC cut its forecast for the pound to an average of EGP 37.5 per dollar, compared to EGP 32.5 in its forecast two months ago.

The bank stated in a research report that when it expected the pound to stabilize in an area between EGP 30 and EGP 35, it was based on developments in monetary policies that would stimulate flows, but these developments did not take place, and pressures on foreign liquidity increased, so it reduced its expectations to a range between EGP 35 and EGP 40.

Aziza Al-Badawy, Senior investment Associate at finbi advisory, said that evaluations are an important factor in upcoming offerings, whether for strategic investors or government offerings.

She told Daily News Egypt that public offerings on the Egyptian Exchange are the most important because the stock market is the mirror of the economy, pointing out that Egypt has political stability that contributes and enhances the implementation of acquisition deals.

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