It's not just a tick-box exercise!

"It's not just a bag sir, it's much more than a bag", Mr. Bean!

Due Diligence in Egypt is a complicated exercise that need to be done with the assistance of many professionals and expertise that's to guarantee a successful transaction. "Not a tick Box exercise"

Welcome to our Bi-weekly newsletter, coming to you from Cairo, Egypt.

In today's bulletin we will cover the main pillars for a holistic Due Diligence exercise for investments in Egypt.

First of all, lets agree on the fact that, each country you are investing in has it's own characteristics and aspects that we need to deal with them all, accordingly, thinking outside the box would be inevitable.

In the next lines, would give the reader a brief about various Due Diligence (DDs) aspects that need to be secured before signing your "SPA" or "The binding offer". The DD exercise is very well known to all of us, I meant to explore what's special to DDs in Egypt and how we can tackle this?

"Sit tight please, we will role the dice now".

Financial DD:

• Trend analysis, Working Capital, net debt statements, adjusted EBITDA are the most famous aspects to check in a normal FDD, adding to the latter, how you would be dealing with the double booking practice of the companies in Egypt, in terms of the FDD exercise deal with the actual (not audited) numbers, it's shambolic for sure, while reflects the real value that needs to be tested. Additionally, you need your DD expert to add some more "Attest" procedures, i.e. reconciliations, third party evidence, confirmations, etc. ?

Tax DD:

• Normal cases, you will deal with five different kind of taxes, i.e. Corporate, WHT, Salaries, Property, Stamp taxes in addition to the Social Insurance as well. In case of double booking, calculate the exposure based on the audited financials and official tax returns and add rigid "Tax Reps & Warranties" in the SPA.

Commercial DD:

• Give this to strategy house rather than big4 firms, despite the DD is very crucial to model building for the valuation aspect. Check, new launches, whether successful or not, market acceptance, demand, positioning, competitors, etc.

Technical DD:

• Usually done by the technical employees of the buyer in case it is strategic buyer, while in case of PEH, technical DD needs to be done. Replacement cost and technical conditions are the most crucial outputs of the study. In addition to the Market value of "Non-operating Assets ", accordingly, it would be added up to the valuation at fair value (FV).

Legal DD:

• Legal lawsuits potential outcomes, contracts and SPA drafting and finalizing, considering all DD outcomes.
• Regulatory aspects for regulated industries, e.g. banks, insurance, brokerage, pharmaceuticals, etc.

HR DD:

• In addition to the normal quantitative findings, e.g. age brackets, KPI's, salaries Benchmark, definite vs in-definite contracts, etc. Very crucial to have the estimated exposure of the "Defined Benefit Plan" and "Vacation Provisions".

IT DD:

• Any Replacement cost for the current reporting system(s), for valuation purposes;
• Data migration issues and any hurdles for the post-deal integration with the acquirer's ERP.

Finally, today's Macroeconomics Synopsis on the go:

1. Standard Chartered Bank predicts the potential increase in interest rates would be in the plateau of 100 basis point. We are waiting for the CBE session on the 24th.
2. Inflation rate is reaching 10% according to last release, influenced by the inflated prices for food and oil subsequent to the Russian/Ukrainian crises.
3. Suez Canal Authority aims to establish an EGP 2 Bn. fund to invest in the "Sustainable Development" coinciding with the Egyptian Government's initiatives.

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