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KARACHI: TRG Pakistan Limited Tuesday announced that its associate TRGIL has entered into a definitive agreement to sell its entire economic stake in its health insurance marketing subsidiary (the company) to a leading US-based marketing company active in the insurance and financial services industry.

According to material information sent to Pakistan Stock Exchange, the key financial terms of that transaction are as total enterprise value of the company $600 million, estimated implied equity value at closing $450 million and estimated consideration for TRGIL $309 million.

In addition to the above consideration, there is a potential earn-out of up to $35 million payable to TRGIL over the next two years, contingent on the successor company meeting certain financial targets in 2021 and 2022.

The transaction is subject to regulatory approvals and other closing conditions and is targeted to close no earlier than 01 July 2021. TRG Pakistan’s prorated stake at closing, excluding any earn-out and prior to net debt adjustment at TRGIL, will be approximately Rs 21.5 billion.

Topline Securities said in its research report that Primerica Inc, a Delaware Corporation has entered into a share purchase agreement with E-Telequote Limited to acquire 80 percent of the shareholding at an EV of $600 million.

The report said that remaining 20 percent stake will be acquired by Primerica over next four years.

The report said that the market was expecting valuation of E-Telequote in range of $100-700 million. Actual deal value ($600 million) has stroked at higher range of previous street consensus.

EV of $600 million translates into EV/EBITDA and EV/Sales of 10.3x and 3.1x, respectively based on extrapolation of the first half of FY21 sales and EBITDA.

The Purchase Agreement also includes the potential for contingent consideration of up to $50 million to be paid by acquirer to selling parties in the form of earn-out payments of up to $25 million in each of 2022 and 2023 subject to meeting certain conditions. These conditions include achieving forecasted EBITDA by the E-Telequote.

This development was also highlighted by Zia Chishti in a conference call organized by Topline Securities that management of TRG was also considering means other than listing to divest their holding in E-Telequote.

Out of the proposed 80 percent stake, TRGIL (45 percent owned by TRG Pakistan) is selling its full stake of 70.25 percent in the target company followed by 9.75 percent stake by management of E-Telequote. Implied Equity value of E-Telequote in this transaction is expected to be $450 million, adjusted for net debt of $150 million. The selling parties (TRGIL and management of E-Telequote) will get $345 million cash (and remaining $15 in subordinated note) which is 80 percent of total equity value of $450 million.

“We estimate that TRGIL will receive cash of $316.125 million (or Rs 48 billion) from this transaction,” the Topline Securities research report said. Given 45 percent stake of TRG Pakistan (TRG) in TRGIL, the impact on TRG will be $142.25 million or Rs 21.6 billion (Rs 40/share), it added.

In last assets monetization of Affiniti and IBEX, the cash flows were not routed to TRG Pakistan, however TRGIL used those proceeds to retire its debt. A meagre amount of $15 million was routed to Pakistan. Currently, TRGIL has outstanding debt of $50 million. Adjusting for that debt, TRGIL will have free cash flows of $266 million. This can be used for either reinvestment or payout. If TRGIL consider to pays this to shareholder then TRG Pakistan can get dividend of $120 million (Rs 18 billion), translating into per share dividend of Rs 33.4.

Management proposed few options in latest call with Topline Securities to benefit TRG shareholders after monetization of these assets. These are (1) distribution of cash dividend, (2) buy back of TRG Pakistan shares and (3) specie dividend of other companies (after listing of all companies) to Pakistan shareholders.

Considering taxes efficiency, for investors in Pakistan the preference of distribution will be following (1) specie dividend, (2) buy back of shares and (3) cash dividend.

The Purchase Agreement may be terminated under certain customary and limited circumstances at any time prior to the Effective Time (as defined in the Purchase Agreement), including by mutual written consent or if the acquisition has not been consummated on or prior to October 1, 2021.

Copyright Business Recorder, 2021

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