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10 Emerging Markets to Watch

EGYPT

Like West Texas, Egypt has a developed oil and gas market

With nearly 85 million people, Egypt is Africa's most populated country. With little arable land and dependence on the Nile River, Egypt has dealt with economic challenges and limited resources throughout history. It is a republic with a developing economy, and the official language is Modern Standard Arabic. English is the most commonly spoken foreign language. The relationship between the U.S. and Egypt has been strained in recent years, with President Barack Obama referring to the relationship in recent months as a "work in progress."

Opportunity

Egypt is credited with having the sixth-largest proved oil reserves in Africa. "It's similar to West Texas," says Paul Welch (pictured), the recently appointed CEO of Cairo-based oil and gas explorer Sea Dragon Energy Inc. (CVE: SDX). "In Egypt, you're in a very well-developed oil and gas market."

The Boston native has spent the past 10 years in Africa, working for companies including Shell Oil Co. and most recently as CEO of Chariot Oil and Gas Ltd. (LON: CHAR), an African-focused explorer. Welch joined Sea Dragon in April, several months after the company completed its most recent major acquisition. Sea Dragon paid National Petroleum Co. Egypt Ltd. roughly $3.25 million for two offshore fields, known as the Shukheir Marine, in December. Welch boasts that production at Sea Dragon has doubled to more than 19,000 barrels per day since the transaction was completed--results, he says, that stand as testament to Egypt's pipelines, plants, treatment facilities and gas lines.

Challenges

Egypt has been in turmoil since the Arab Spring, the wave of revolts that swept across the Arab world in early 2011 and led to a rebellion in Egypt that ousted longtime President Hosni Mubarak. Egypt has since seen a severe decline in revenues, and more than 25 percent of citizens have fallen below the poverty line due to rising food prices, high unemployment, low fuel supplies and high inflation. Tourism and investment have been hit hard. The overthrow of elected Islamist President Mohamed Morsi by the military of July 3 led to a series of protests from the Muslim Brotherhood which ultimately turned deadly. *On Aug. 14, violence ensued when police, later backed by Egyptian soldiers, moved in against two antigovernment sit-ins in Cairo where the death toll is reported to be more than 500. "The city is quiet and calm after yesterday's turmoil," says Welch on Aug. 15. "Obviously would much prefer a peaceful transition," he adds, explaining that Sea Dragon's exploration efforts are still taking place.

"We are trying to add additional production and exploration assets to our portfolio," Welch reports. "We're not necessarily looking to acquire any companies at this point. Not everyone shares our view and some companies are selling assets to reduce their exposure to Egypt."

Notable Deals

No deals involving a U.S. company have been completed in Egypt in 2012 and 2013. Buyers from outside the country came through in at least one deal: Singapore-based Olam International Ltd., the global processor of agricultural products and food ingredients, purchased Dehydro Foods Ltd., a processor of onions and herbs, for $30.8 million in November. Dehydro ships its products to Europe, North America, the Middle East and Asia.

"Other than a couple of minor transactions, the most activity has been from companies in industries licensed by the government," reports Glenn Pollack of Candlewood Partners LLC, a Cleveland-based merchant bank that specializes in advising middle-market companies on the international front.

Such instances are not indicative of an M&A comeback, he says. For example, a deal between Qatar's QInvest LLC and Egyptian banking firm EFG-Hermes Holding SAE to create the world's largest Arab investment bank, recently collapsed due to regulatory delays. EFG, Egypt's largest investment bank, is currently selling assets and looking to cut up to $72 million in costs.

Pollack has seen his own deals stall in Egypt. Since 2007, Candlewood has been the financial adviser of Egyptian container port terminal Damietta International Port Co. The firm has negotiated $800 million worth of equipment contracts for Damietta to be put toward construction of a shipping terminal project 44 miles west of the Suez Canal as a means to facilitate trade. Pollack had arranged $860 million in financing and needed $900 million more, but financing proved to be too difficult in the midst of the revolution and the project was never completed.

Future

Egypt's GDP grew slightly more than 2 percent in 2012 to $255 billion. But the International Monetary Fund expects improvements in 2013 and 2014. "You can never predict the political changes," Welch hedges. "But all the signs are there for Egypt to improve."

*Updated on Thursday, Aug. 15