Orascom Inv Regulatory News (OIH)

Note to the shareholders of Orascom Investment Holding S.A.E

Cairo, 10 April 2019, In light of recent inquiries and comments received from investors, analysts and specialized media regarding the latest resolutions of the Company's Board of Directors during its meeting on April 3rd, 2019 concerning the Company's future investment strategy, Orascom Investment Holding (Orascom Investment or the Company) would like to highlight the following clarifications :

Orascom Investment Holding's investment strategy:

Since the demerger of Orascom Telecom Holding in 2011, Orascom Investment Holding's (Formerly Orascom Telecom Media and Technology Holding)'s management has been exploring several alternative opportunities for its investment strategy. However, the investment climate at that time was discouraging to enter into investments in other or new sectors; accordingly, the Company divested some of its core investments in the telecommunications sector and has distributed extraordinary dividends to its shareholders amounting to EGP 7.4 billion approx. over the past years.

With the stability of the investment climate in Egypt and given the extensive experience of the Company's management and building on its previous successful investments in more than 20 different countries, creating more than 30,000 jobs and hence creating value to all its shareholders over the years, the Company decided to revisit its investment strategy by exploring the huge opportunities for growth it sees in new sectors, focusing mainly on five new sectors; the first of which is the financial services sector, whereby the Company has managed to acquire Beltone Financial Holding for EGP 4 per share, which rose over the five months following the acquisition to EGP 16 per share. During the past three years the Company acquired Auerbach Grayson in the U.S. through Beltone Financial Holding, established Riza Capital in Brazil, and finally acquired a 30% stake in Sarwa Capital, a leading provider of consumer finance and other financing solutions in Egypt with growth reaching around 50% in 2018 to achieve EGP 283 million in net profits.

Investment in the Agribusiness and Logistics Sectors:

By the beginning of 2017, the Company started to explore several investment opportunities in the food and agribusiness industry in Egypt and Africa as it is the management's belief that this sector is very promising due to several factors, mainly the relatively low labor cost, the availability of trained work force in the Egyptian market, the strategic geographical location of Egypt enabling it to access major and nearby markets, in addition to its entry into several international treaties with neighboring countries that give it competitive advantages to export its products.

Moreover, the World Bank estimates high growth rates in the local food market in Africa in addition to the continuous growth in the Egyptian market due to population growth and growth in gross domestic product.

Orascom Investment aims to capitalize on the relatively low production cost structure in Egypt, particularly after the recent devaluation of the Egyptian Pound, to locally produce food products comparative in quality to European and American standards at competitive prices.  These products aim to satisfy the large demand for high quality food products in Egypt as well as other African and emerging markets, which are currently dependent on imported products. 

As the agribusiness industry is highly dependent on logistics services, Orascom Investment is planning to build a nation-wide logistics platform to create a strong arm for distribution and trade, further increasing the profitability of the agribusiness sector it intends to invest in. The Company also plans to offer these services to third parties knowing that there is a huge market gap for high quality logistics services meeting international standards.

Furthermore, the Company is currently studying several projects for the production of food-related products including dates derivatives such as liquid sugar, tomato derivatives including medical oils, aromatic plants derivatives, juices, dairy products, and light food products. The Company will further disclose details of such projects upon the completion of the relevant studies.

Clarification on the Acquisition of Nile Sugar Company:

As a first step towards achieving its vision and strategy in the agribusiness sector, Orascom Investment's management eyed the sugar industry in Egypt to serve as the base of its agribusiness projects. The Company identified a gap of around 30% in the sugar market in Egypt, which is growing at a further 80,000 tons annually. Currently, Egypt produces around 2.2 million tons of sugar against a market demand of about 3.2 million tons per year. This gap is currently being covered through imports.

Thus, Orascom Investment reached out to its major shareholder being one of the largest investors in beet sugar cultivation and sugar production in Egypt, who pointed out to the Company's Board of Directors the challenges and difficulties facing sugar manufacturers in Egypt, all of which have been taken into consideration while evaluating Nile Sugar Company. The major shareholder expressed his reservations with regards to the Company's proposal to purchase the shares of Nile Sugar Company, it being a related party transaction. However, after conducting all necessary studies, and prioritizing the shareholders' best interests, the management decided to submit an offer to acquire Nile Sugar Company. The major shareholder accepted the submission of such offer subject to the minority shareholders' approval of the transaction, on which he will abstain from voting.

Regarding the Valuation of Nile Sugar Company:

1. Orascom Investment Holding appointed legal and financial advisors to conduct the due diligence on Nile Sugar Company, in addition to appointing an independent financial advisor for determining the fair value of Nile Sugar Company. Furthermore, Orascom Investment Holding's auditor reviewed the valuation of the independent financial advisor and issued his opinion thereon in accordance with the competent laws and regulations.

2. The current average sugar price in Egypt is at its lowest since the devaluation of the Egyptian Pound. The profitability of Nile Sugar is highly sensitive to changes in sugar price. For example, an increase of EGP 1,000 per ton (approximately 13% of the current price which is around EGP 7,200) would reflect into an increase of EGP 200 million in its net profit.

3. With regards to comparisons made between the valuation of Nile Sugar Company and another traded company in the market, the Company deems such comparisons inaccurate, as it is necessary to neutralize the effects of the following factors on the traded company's results:

a) Valuation method of the company's inventory,

b) Capitalization of other costs,

c) Reversal of provisions that are no longer needed,

d) Profit share in other companies,

e) Recording employees' profit shares as a reduction of equity and not an expense.

4. Some of the recently incorporated companies operating in the sugar industry have incurred high costs in purchasing its equipment after the currency floatation, causing them to incur higher debt levels and realize carried forward losses amounting to billions of Egyptian Pounds combined, almost equivalent to the value of Nile Sugar Company's acquisition price. The debt burden and the carried forward losses will have an impact on these companies' ability to distribute dividends to their shareholders for a prolonged period of time.

5. One of the advantages of the transaction is that the land of Nile Sugar Company can be transformed into an integrated food industry complex. Currently only 45% of the 1 million sqm land which enjoys a very good location is being utilized by the factory. The land also boasts complete facilities including natural gas, water and a high capacity power plant.

6. Nile Sugar Company adopted a vertical integration strategy by growing beet, whereas the percentage of beet grown by Nile Sugar used in its sugar production increased from 0% to 20% in the past 7 years. This percentage is planned to increase to 30% during 2019 mitigating the risk of low beet supply. It is worth mentioning that the experience of Nile Sugar Company in growing sugar beet is very successful according to the report of the Ministry of Agriculture and Land Reclamation (Sugar Crops Board). The report states that Nile Sugar Company's sugar beet cultivation program in the Dhabaa area with average yield per feddan ranging between 28-57 tons (based on plant age) has reached higher productivity levels than the average productivity levels in Egypt or any other European country known for having the highest beet productivity levels. .

The Company took a conservative approach in the valuation of Nile Sugar Company, taking into consideration the challenges and difficulties facing the sugar industry in Egypt. In light of the valuation and the due diligence results and discussions between the Company's management and representatives of the seller, the Board of Directors decided to proceed with presenting to its shareholders the opportunity to acquire the shares of Nile Sugar Company for an amount lower than the independent financial advisor's Valuation by EGP 100 Million for their approval, while the major shareholder will abstain from voting.

Transaction Execution Mechanism:

In light of the governance rules and regulations and the commitment to minority rights, Orascom Investment Holding notes that its major shareholder will abstain from voting on the transaction while voting shall be limited to the minority shareholders. In case the minority shareholders vote against the transaction, the Company will proceed with exploring other investment opportunities in the previously mentioned sectors.

If the minority shareholders vote in favor of the transaction during the Ordinary General Assembly due to be held on the 5th of May 2019, the Company will sign the sale and purchase agreement and pay an amount of approximately EGP 429 million (EGP 359 million representing 10% of the purchase price plus settlement of EGP 70 million of shareholders loans). The remaining amount of EGP 3.2 billion shall be paid by the issuance of new shares through a capital increase at par to all existing shareholders prorate to their shareholding amounting to approximately EGP 6.2 billion through the Ordinary General Assembly meeting to be called for after taking the necessary steps.

Orascom Investment Holding's Funding Policy:

The Company's funding policy for the above-mentioned projects is based on (i) bank loans including a medium-term loan from the African Export- Import Bank (Afreximbank) for an amount of USD 170 million and (ii) the proceeds from the capital increase in case the shareholders approve the acquisition of Nile Sugar Company during the General Assembly scheduled to be held on the 5th of May 2019.

Finally, Orascom Investment Holding reaffirms its commitment to its investment strategy to achieve the best results and maximize profits for its shareholders. As previously explained, the approval of the acquisition of Nile Sugar Company is left to the decision of the minority shareholders during the General Assembly.