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Up in smoke as tobacco company privatization reaches impasse - Daily News Egypt

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Up in smoke as tobacco company privatization reaches impasse

Cleopatras and Marlboros might be at the opposite ends of the cigarette price range but one thing they and all other cigarettes available on the market have in common is that they are produced by the same company, the Eastern Company S.A.E. which maintains a near-monopoly in the local market, most experts agree. Although the …


Cleopatras and Marlboros might be at the opposite ends of the cigarette price range but one thing they and all other cigarettes available on the market have in common is that they are produced by the same company, the Eastern Company S.A.E. which maintains a near-monopoly in the local market, most experts agree.

Although the Ministry of Investment (MOI) indicated last year that it intended to privatize the Eastern Company, more recent statements have indicated that there are no such plans forthcoming at this time.

The reason, according to Bassim Arida, Director of International Sales at the Commercial International Brokerage Company (CIBC), is that opposition to the privatization of the Eastern Company will be fierce in parliament.

“Their main problem is the People’s Assembly. My hunch is that they are dying to privatize, but the opposition in parliament will be great, as they consider it a crucial industry, Arida told The Daily Star Egypt.

Therefore, Arida believes the privatization process will be delayed because “it won’t be easy for [Minister of Investment] Mahmoud Mohieddin to sell it to parliament, as they tend to stall everything.

Another reason according to Arida is that the (MOI) is trying to maintain some clout with any prospective buyer and forestall the increase of the price of cigarettes in Egypt for at least the first three or four years and then increase it incrementally after that.

A market source told The Daily Star Egypt on condition of anonymity that “The privatization of Eastern Tobacco is not as simple as the companies on the government’s privatization list for many reasons.

“Firstly, this is a profitable company as opposed to your usual public company that operates at a loss. Secondly, tobacco is a strategic good and we are the highest consumers in the Arab world, the source added.

“There are fears that if the company is privatized, the prices may be hiked and you don’t want to tell Egyptian smokers that the price has increased in this environment of high inflation and after they had witnessed an increase in oil prices.

Ahmed Samir from Media Relations of the MOI told The Daily Star Egypt that there are no set plans at the current time for the privatization of the Eastern Company. “There are around 45 other companies listed for sale, but Eastern Company isn’t one of them. Within the coming period that might change but at this time it is not on the list.

But the government may eventually be forced to sell of the highly profitable tobacco manufacturer in an attempt to cut the budget deficit with inflation in Egypt reaching 11.8% in October.

“With the higher inflation, Arida said, “the government will need to speed up privatization because of the negative effect on the budget deficit. They have holes and gaps in the budget deficit they need to fill. Al Alam Al Youm newspaper had stated that the privatization plans for the Eastern Company were temporarily put on hold until an appropriate method was devised for its sale and issues of it being a monopoly were resolved.

Arida stated that the expectation in the market was that the Eastern Company would be listed either this year or the next.

“At least 90 percent of the market share of the Eastern Company is held by foreign funds. They’re expecting it to be listed this year or maybe next year. British American Tobacco (BAT), Phillip Morris and Altadis are expected to come in for it, he said. A Joint Subsidiary Company, the Eastern Company, was established in 1920 and made LE 500 million profit after tax for the year ending June 2006, according to its financial statements.

Its cash receipts from customers totaled over LE 7 billion.

However, Arida believes that the company could be even more profitable under foreign management. “Their earnings at the moment are decent, but they can make more if run by a professional international outfit. Also, they import the tobacco from Africa and Brazil so if you have a bigger corporation with more plants you can improve your profits.

Egyptians are the biggest consumers of tobacco in the Arab world. Total consumption in 2003 was 61.8 billion cigarettes and expected to rise by 8 percent according to Euromonitor International, a global market research and analysis company.

Topics: FJP

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