Today’s Trading Playbook
Amr Hussein Elalfy CFA | Head of Research
KEY THEMES
Aristotle, the Greek philosopher, once stated that "the whole is greater than the sum of its parts". In finance, we have a name for this. It’s called “Synergy”. We referred to this in Sunday’s issue when we alluded to the accretive value EFG Hermes Holding [HRHO] can create from its acquisition of Arab Investment Bank (aiBank). However, in finance this is not always true. Contrary to Aristotle’s claim, the sum of parts can sometimes be greater than the whole. Again, in finance, we have a name for this. It’s called “Spinoff”. We also referred to this concept here before, once by end of November and more recently by mid-December. We were arguing that a “spinoff” (also known as a “demerger”) can result in an arbitrage opportunity if a company is split based on book value (which is how spinoffs are implemented here in Egypt) rather than fair value.
As expected, Egyptian Iron & Steel’s [IRON] shareholders approved yesterday splitting the company into two, one owning the steelmaking business and its land bank and the other owning the mines and quarries. Shareholders also called for the liquidation of the former’s loss-making steel factory. While the liquidation underscores the operational issues IRON has had for so long, it is hoped to unlock the value hidden in its land bank on one hand and the scrap value of its steel factory on the other hand. So, while the shareholders’ decisions did not come as a surprise, it remains to be seen how the valuation reports will draw the line between the two companies. For current shareholders, the valuation reports will only split IRON’s assets and liabilities—and hence equity—into two separate companies owned by the same current shareholders. But in terms of valuation, this spinoff might represent an Aristotle contradiction with the two new companies’ values eventually turning out to be greater than the whole (IRON).
POSITIVE
IRON, ESRS: IRON’s spinoff should (1) stop the hemorrhaging of IRON’s value, (2) unlock the value inherent in IRON’s land bank, and (3) free IRON’s new mines and quarries company to create value for its shareholders by better utilization of its assets. Meanwhile, the liquidation of IRON’s steel factory leaves Ezz Steel [ESRS] and its 55%-owned subsidiary Al Ezz Dekheila [IRAX] as Egypt’s two key steelmakers listed on the EGX, potentially opening the door for future M&A activity as part of a sector-wide consolidation wave that we think could be in the making.