Engineer Tamer Gad Allah, the Chairman of the Eastern Company
Engineer Tamer Gad Allah, Chairman of the Board of the Eastern Company, said that the door to acquire shares in the company has been open since the offering of 28.5% of the company’s shares on the Egyptian Stock Exchange for the first time in 1995. Since then, the government's shares have decreased, either through other offerings or capital increases, to reach a stake of 50.9% in the Eastern Company in 2019. This led to its transition from Law No. 203 of 1991 for the Public Business Sector to Law No. 159 of 1981 for Companies.
He added that during the state's repeated offering of its shares, no tobacco company came forward to buy a stake, except for an Emirati company that invested in the last offering in 2019 and managed to obtain 1%. It then raised its stake through the open market to increase its shareholding to 3.29% of Eastern Company's shares.
Gad Allah explained, in an interview with Bloomberg Asharq, that the government demolished the monopoly of the tobacco industry in Egypt by opening up the opportunity to invest in the tobacco manufacturing activity to all foreign and local tobacco companies operating in Egypt through a limited bidding process to grant a new license for cigarette production in Egypt. This allows for the injection of new foreign currency funds into the state treasury. All companies submitted bids to purchase the limited bidding terms booklet in February 2021. The bidding was reopened in December of the same year to allow all invited tobacco companies to submit their technical and financial bids. A company registered in Egypt and owned by Emirati companies and one of the global tobacco companies was selected, and its financial and technical offer was accepted and granted the manufacturing license.
He also confirmed that the only Egyptian partner of the company that obtained the second tobacco manufacturing license is Eastern Company.
The Chairman of the Eastern Company stated that the cigarette market in Egypt is divided into three segments including local segment cigarettes which is consumed by the largest group of smokers with middle and low incomes, medium-segment cigarettes; and high-end cigarettes.
He indicated that companies have the right to apply for a new tobacco manufacturing license. The state has reserved the full right to grant one or more licenses at any time it sees fit to anyone wishing to invest in the tobacco manufacturing field under technical and financial conditions no less than those on which the second manufacturing license was granted in 2022.
He pointed out the key conditions of manufacturing tobacco in Egypt, which included several conditions to protect the Eastern Company and grant equal opportunities to all companies, most notably stipulating that the minimum annual production quota for any recipient of the license must be one billion cigarettes, exceeding the minimum for most of the companies invited to the limited tender.
-The conditions also included prohibiting the licensed company from manufacturing cigarettes for third parties (i.e. allowing it to only manufacture cigarettes of brands owned by itself and its shareholders).
He added that the conditions included obligating any past or future recipient of a manufacturing license to allocate 24% of its shares to Eastern Company, with the shareholders of the licensed company committing to pay the Eastern Company's full share of the license value (free of charge) on the Eastern Company's behalf; in addition to requiring the manufacturing fees collected by the licensed company for brands it manufactures owned by itself or its shareholders to be no less than fees previously paid by the license recipient to the Eastern Company before obtaining the manufacturing license.
The conditions also stipulated prohibiting the licensed company from manufacturing cigarette varieties falling under the lowest price tier, being reserved for "local segment cigarettes."
On the other hand, the tender book did not prohibit the bidding company from having more than one shareholder from among companies operating in Egypt's tobacco sector.
Regarding the impact of issuing the second license on the competition across the cigarette manufacturing industry; Gadallah confirmed that following the issuance of the second license, any tobacco or other company wishing to invest in tobacco products can achieve that. Additionally, importing factory-made cigarettes from abroad has been permitted by Egypt both before and after issuing the second license. Egypt has also since allowed Egyptian companies with foreign ownership to engage in import activity, which was previously limited to Egyptian-owned companies.
He added that many options are available to companies operating in cigarettes and tobacco products in Egypt including; first, importing factory-made cigarettes from abroad (within the second and third segments/tiers) enjoying low import tariffs of around 2 Egyptian pounds per cigarette pack, compared to minimum import tariffs in some GCC countries of 2 AED (17 EGP) and Saudi Arabia's minimum of 4 SAR (33 EGP) per pack according to the exchange rates on March 3, even if the tariff rate imposed on imported cigarettes in Egypt is tripled in the future compared to the current tariff. Second, manufacturing at Eastern Tobacco Company's facilities according to direct commercial understanding between the parties. Third, applying for a manufacturing license under identical technical and financial conditions to the April 2022 issued license.
Gadallah added that the Chemical Industries Holding Company's decision to offer 30% of its stake in Eastern Company came as a part of Egypt's broader initial public offering (IPO) program that comprised 35 state-owned companies, including Eastern Company, meaning that selling part of the state’s stakes was not limited to the Eastern Company only; pointing out that the Emirati company has submitted an offer for an amount not less than the amount offered by the competing company that worth US$ 625 million, which exceeded the share price on the Egyptian Stock Exchange at the time of signing the agreement by approximately 45%. The government was keen that the selling price of the shares and payment shall be in US dollars according to the exchange rate announced by the Central Bank of Egypt at that time amounting to (30.94), in addition, the buyer waived 500,000 square meters, without price at the request of the Holding Company, even though it is included in the valuation.
On the other hand, Gadallah said that the company's shareholder structure is currently distributed among the Holding Company for Chemical Industries with a percentage of 20.95%; Foreign investors of various nationalities with a total percentage of 59.2%; and Egyptian shareholders from Egyptian companies and financial institutions with 19.85%.
Regarding the steps taken to protect the “local segment” cigarettes; Gadallah stated that although the new investor acquired 30% of Eastern Company’s shares, Eastern Company will not manufacture any of its local segment brands, contrarily to its commercial brand, to any party whether it was one of its shareholders (including the new investor) or otherwise, to maintain its business, its market share, and the interest of its shareholders and its workers, which amounts to 8,000 workers, exceeding 6 times compared to the second-largest tobacco company in Egypt, while the number of shareholders exceeds 6,000 shareholders.
In addition, Tamer Gadallah revealed that Eastern Company intends to open letters of credit to buy tobacco and non-tobacco raw materials worth more than US$ 200 million before the end of this month and the same during the next month to increase production to meet local demand, as well as expanding in the future to export its tobacco products to COMESA countries to maximize its sales and to get the most out of the trade agreement between Egypt and COMESA countries. In addition, Eastern Company plans to boost its investments in the molasses industry and modernize it to increase its sales in the local market and foreign markets.
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