PPL SPO–mission accomplished

Another IMF’s privatisation condition: check. What’s even better is that unlike the last transaction of United Bank Limited (UBL) a few weeks ago, PPL’s secondary public offering (SPO) was far less contentious.
Asif Ali Qureshi, Director Optimus Capital Management, calls the PPL transaction overwhelming, successful and rare. While the successful nature of the sale is apparent from the SPO being fully subscribed, the rare and overwhelming phenomenon can be explained by the fact that the strike price of Rs219 after the book building process stood at a premium to the stock’s prevailing market price. This was in fact contrary to what the movement in the stock price had earlier predicted.
The government divested its five percent holding in Pakistan Petroleum Limited. At a price of Rs219, the PPL transaction was oversubscribed by 1.04 times; thanks to which the government has garnered a total of Rs15.98 billion from the transaction.
The Finance Ministry says the focus of this transaction has been domestic institutions and High Net Worth Individuals (HNWI) so much so that all the road shows were conducted only within the country. And the results were quite visible: 64 percent of the offer was purchased by domestic institutional investors, 24 percent by HNWI and only 12 percent by foreign investors that include leading names like Lazard, Invesco, Robeco AMC and Tundra Fonder.
Unlike the recently-held UBL deal, when local participants had held many reservations over transparency and management issues, PPL’s secondary public offering was much better managed. This was partially due to the Dutch auction mode of arriving at the strike price where the colour of the book was being displayed and bid revision was allowed to the bidders to make an informed decision. This brings us to the second positive of the PPL deal, primarily for the issuer. The smaller size of the deal compared to UBL, and the familiarity with the process rightly led to a strike price much higher the floor price (Rs205).
Now that PPL has set the ball rolling for the oil and gas sector, how does this transaction set the stage for the upcoming OGDC’s GDR issue? While some fund managers have a point that foreign investors are usually attracted to stocks in sectors that are closely related to the domestic economy in a developing country, Farid Alam-–CEO of AKD Securities-–says that after the recent transactions, OGDC’s GDR will fetch a price of Rs300 plus sending positive signal to foreign investors for the exploration and production sector of a developing country that has one of the best success ratios in the world.
Goodies aside, a few critics still raise questions over the sagacity behind the government’s decision to take the easier route to sell stakes in firms that already give decent returns to the government. Others raise concerns over the gradual transfer of ownership to private groups. Giving up an average return of 20 percent (dividend and earnings) to retire about 10 percent of debt cost makes little sense, laments an industry expert.
As crucial as it is, what affect will privatisation attempt of PPL have on its stock price will be seen later during the day. Unlike UBL where the discount in strike price was termed as a sign of weakness for the stock in the immediate future, PPL has better expectations. In part this is because, Unlike the UBL deal, when the strike price was only 2 percent higher than the floor price, PPL’s strike price was about 7 percent higher than its floor.
Market sources see a rise in PPL’s stock price with a fairly decent float addition in the immediate future. Farid Alam thinks that the unmet appetite of HNWI and institutional investors this entire year might help PPL’s share price jump by 10 percent this week and by 20-30 percent during the next one month. With such guesstimates and strong operational history, PPL is surely in for some good times at the bourse.