ICI acquisition - welcoming foreign player
The Karachi Stock Exchange went abuzz with notices regarding ICI acquisition as Lucky Cement and Nishat Mills showed intent to carry out a due diligence process to evaluate and assess the viability of a potential acquisition of 75.81 percent of the issued and paid-up share capital of ICI Pakistan Limited. What is heartening is that a foreign company Fajr Capital along with ICORP Private Limited has also been qualified for the bidding phase. Foreign Direct Investment has long been dried up in Pakistan and Fajrs interest in investing nearly 100 million dollars in Pakistan, regardless of what happens in the bidding round, is a warm signal, one that would help better Pakistans image as an investment avenue in the outside world. Fajr Capital is an international Islamic investment firm with a focus on key Muslim markets and is owned by a diverse set of shareholders - the Abu Dhabi Investment Council and Government of Brunei Darussalam being the major ones. A potential acquisition of ICI by Fajr may not add synergies to the company, as its portfolio currently revolves around energy and financial services. It is the inclusion of ICORP, a company managed by certain current employees of ICI Pakistan that will certainly make Fajr a favourite candidate in the bidding round, as it will have relatively better understanding of matters in the ICI Pakistan. Lucky Cement, a prominent player in the local bourse lately is also in contention and will bid for the company once due diligence is completed. If the prospective acquisition is looked at from the point of view of Lucky Cement alone, the motive appears to be diversification more than anything else. ICI has a strong repute in the market, and is held high for being a stable company with a strong brand identity, the addition of which to Luckys portfolio appears highly favourable. As for Luckys financial health, the company is quite strong financially. Luckys operating cash flow position is also quite healthy, having improved from Rs1.4 billion at the end of March-11 to Rs 5.8 billion at the end of March-12, in addition to Rs 0.6 billion as cash and bank balances. There are expectations that this cash flow position will improve even further by the end of the current fiscal year owing to favourable industry dynamics. Looking at the healthy cash position of the company, it seems probable that the financing for this acquisition will not be much of an issue for the company. If need be, the company may resort to partial debt financing, which again should not be a problem as Luckys leverage position has been quite strong and has also improved over the years. Nishat Mills is the other company which has qualified to place a bidding once done with due diligence. The groups strength in Pakistan is known to one and all, as it has a diversified range of businesses in its portfolio from banking to the energy sector. Most relevant, in this case, is however, Nishat Mills, which has an eye on ICIs shares on offer. Nishat Mills has a slightly heavier leverage on its books when compared to Lucky Cement, but that does not restrict its ability to finance the acquisition, through equity or debt. Should Nishat Mills end up wining the bid, it would bring valuable synergies to its existing business line. One would be quick to remark that recently the margins of ICI Pakistan and its key divisions have taken a southward turn. Yet, it should be noted that the downturn in PSF prices and margins is also cyclical and the business had witnessed three exceptional years since 2009. Though it is expected to return to pre-2009 levels this year, the likelihood of this reverting back to stupendous margins after a few years should also be kept in mind. In fact, analysts claim that it may just be a good time for acquiring ICI Pakistan. "Going forward, PSF margins will likely improve after a few years, while the installation of coal boiler plants for the Soda Ash business will reduce the reliance on gas and pay back the acquiring company positively after 3-4 years. This is a good time for the acquirer on the negotiating table when the margins are low," said Furqan Punjani of BMA Capital. Considering the market price of ICI Pakistan of roughly Rs 130 per share, and a valuation per share of Rs 150 by AKD Securities, the prospective outflow will be between Rs 9-10 billion. All in all, while its too early to comment on the likelihood of the acquisition materializing, it will, indeed, be a major event for Pakistan. And should Fajr Capital strike the deal, it will be a stepping stone for other foreign investors to eye Pakistan as an attractive investment avenue.