By Una Galani/Dubai

 EFG Hermes is in a strategic limbo. The Middle East’s top investment bank was to spin off part of its assets in a merger with Qatar’s QInvest. The Egyptian regulator, though, appears reluctant to make a decision until accusations of corruption against EFG Hermes co-CEOs are resolved. With bankers betting the deal has been sunk by politics, EFG must now focus on closing the discount to the sum of its parts on its own.

The QInvest-EFG deal was driven by a desire to salvage as much value as possible from the bank following the uprising that precipitated the end of the Mubarak autocracy two years ago. The ties between EFG’s executives and the old regime have weighed heavily on the bank since. Its shares slumped 62% - almost three times the decline of the local index. Analysts estimate that EFG now trades at a discount of between 20% and 30% to the sum of its parts.

The bulk of EFG’s value is split between two disparate divisions. Its majority stake in commercial bank Credit Libanais, acquired in 2010, contributes roughly 62% of the group’s revenue. The investment bank brings in the remaining 38%. There are limited synergies between the two branches, but Credit Libanais’ stable business kept EFG profitable until the last quarter, when the Egyptian lender recorded a net loss. EFG also has a private equity unit and a minority stake in local real estate developer Sodic.

A break-up and sale of those assets would make sense if QInvest’s bid to buy the investment banking assets got a green light from the authorities. EFG did not exercise its option to buy a further 25% of Credit Libanais last year. Now, off loading a Lebanese bank at an attractive valuation may be hard, given the renewed political crisis in Beirut.

Without the regulator’s blessing, EFG has little option but to cut costs aggressively. The firm is well capitalised, with a debt-free balance sheet. The problem is that it will take time before the business outlook improves in Egypt. EFG has already cut its operating expenses 20% since the uprising. Keeping its independence will be a challenge.

CONTEXT NEWS

nEgypt’s EFG Hermes, the Middle East’s top investment bank, confirmed on April 7 that its joint venture agreement with Qatar’s QInvest will lapse on May 3 unless it gets regulatory approval from the Egyptian regulator.

n “If EFG does not receive a “no objection” from the (Egyptian Financial Supervisory) Authority in the coming days, it will be difficult to implement the joint venture agreement,” EFG said in a statement.

n The transaction would move EFG’s brokerage, research, asset management, investment banking and infrastructure businesses into a joint venture 60% owned by QInvest.

nQInvest would inject $250mn into the joint venture and have the right to buy the remaining 40% over a period of 12 to 36 months after the close of the transaction for $165mn or a fair market valuation.

n Shareholders would receive a one-off dividend of 4 Egyptian pounds ($0.58) per share after the deal closes, which was originally expected in the third quarter of 2012.

nEFG recorded a net profit loss of 21mn Egyptian pounds during the fourth quarter, driven by losses at the investment bank.

nThe bank’s co-chief executives, Hassan Heikal and Yasser el-Mallwany, face allegations of insider trading relating to Al Watany Bank in 2007. The board of EFG has previously stated its full support in the firm’s CEOs.

n Shares in EFG have fallen 29% since it agreed the QInvest deal in May last year, compared to a 4% rise in the benchmark index.

(The author is a Reuters
Breakingviews columnist. The opinions expressed are her own)