On Monday, two companies literally stole the show at the local bourse; one with a five percent increase in the market price, and the other with a decline of about four percent. The latter acquired 75.81 percent shareholding of the former, in consortium with other entities in its group. In case you haven guessed by now, the two companies were ICI Pakistan and Lucky Cement, respectively.
Lucky was the chosen one of three potential buyers, the other two being Nishat Mills Limited and a consortium of Fajr Capital of Dubai and ICorp (owned by some existing employees of ICI Pak), though Nishat withdrew its proposed acquisition.
Though Fajr Capital and ICORP were the favourable contenders, bearing in mind ICIs managements interest involved in the acquisition, with Lucky coming up as the successful bidder, a few of ICIs employees may have been disappointed.
It was the bid value of $152.5 million (roughly Rs14.4 billion) for about 70 million shares in the newly de-merged entity that had caused much furor amongst analysts and investors in the market, with many believing the price tag for ICI Pakistan being quite hefty.
The above translates into a share price of about Rs206 per share, which is about 24 percent above ICI Pakistans closing price of nearly Rs166 per share on Monday. The significant premium to the purchase price and analysts concerns about Luckys management not being able to announce cash dividends in the upcoming full-year FY12 results is what mainly explains investors negative response to the news.
Lucky Cement will reportedly account for 51 percent of the total acquisition, with the remaining companies taking up 49 percent. This will bring Luckys required outlays for the acquisition to Rs7.3 billion approximately.
As per the latest available financial reports, Lucky has Rs628 million in cash and bank balances, while its net cash flows from operations stood at Rs5.8 billion at March 31. This cash flow position is expected to further improve, going forward, since the cement industry has been enjoying quite favourable dynamics lately.
The apparently healthy cash position of the company shows that financing this acquisition should not be much of an issue for the company. The company may resort to partial debt financing, which will, again, be helped by Luckys strong leverage position, with its debt-to-equity ratio improving consistently towards lower leverage for the past few years. Given expectations of improved cash flows in the coming years, repayment of any debt taken should not be a problem for the company either.
As for the acquisition price, the general sentiment in the industry is that ICI Pakistan has been acquired a tad expensive. As of late, margins for key divisions of ICI Pakistan - PSF and Soda Ash - have taken a nosedive in terms of margins, with global recessionary pressures, lower cotton prices and frequent gas outages in the country being primary culprits.
Given this scenario, one does tend to wonder the suitability of the price tag on ICI Pakistan. Needless to say, it also explains the jump in ICIs share price seen on Monday.
However, Lucky is plausibly banking on the great potential and strong management and brand identity of ICI Pakistan. For the Yunus Brothers Group as a whole, synergies with ICI Pakistan can be explained vis-à-vis the groups establishments in the textile area as well, considering ICI Pakistans leading business division is the Polyester Staple Fibre (PSF) - a product consumed by the textile industry as a substitute for cotton.
For Lucky on its own, the motive appears to be diversification more than anything else, with reports that the company plans to make some serious long-term investment plans in ICI Pakistan.
Besides, the potential of ICI Pakistan as a company should not be entirely discounted. The slump in PSF prices and margins is seen today is a cyclical phenomenon and the business had witnessed three exceptional years since 2009. Though there are expectations of it returning 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.
Further, the Soda Ash division of the company is in the process of installing coal fired boilers at its plants, which will reduce the dependency on gas and give a further boost to the divisions and companys margins in future.
Therefore, while analysts and investors may question the feasibility of the acquisition from Luckys point of view, it seems that the company has eyed payoffs in the long-term rather than the near future.