THE market is still rife with rumours over what could have prompted the Chinese company Shandong Ruyi Science and Technology Group Co. Ltd to pull back from its offer to acquire 31.2m shares of Masood Textile Mills Limited — a company listed on the KSE.

The intended acquisition was approximately for 52pc of the 60m paid-up shares of the company. The mainland Chinese firm’s desire to acquire Masood Textile Mills (MSOT), first announced on December 5 last year, had created a great deal of excitement in the market. And the abrupt announcement last Tuesday that the transaction had been called off caused more furor.

Neither the company nor its lead manager offered any clue as to what may have soured the transaction. Explanations offered by analysts and sector experts ran from the ordinary to bizarre.

A notice by the company stated that the conditions required to be fulfilled under the Share Purchase Agreement (SPA) between the sellers and the acquirers for the transaction were not fulfilled within the agreed timeline, which was why the completion of the transaction was no longer possible under the SPA terms.

Masood Textile resolves to make an equity investment of Rs200m in an associate company to set up a 12MW biomass-based power plant. By the end of the last financial year, it had invested Rs0.16m in associate company’s equity

Yet many suspect that the uncertainty over the political situation in the country could have deterred the Chinese buyers. The Chinese firm may also have changed its mind as the euphoria created over the granting of the GSP Plus status to Pakistan seems to have not worked out so far. The benefits thought to accrue are yet to be seen.

Even Punjab Governor Chaudhry Sarwar earlier last week warned textile manufacturers that trade concessions for textile and other products under the GSP Plus scheme “will be meaningless if the country fails to double its exports”. He did, however, concede that the growing shortage of gas and electricity is to blame for the textile sector’s woes. Whatever the reason, the country may have missed an opportunity for Chinese investment. Some analysts calculate that around Rs8bn would have flowed into the textile sector if the Masood buyout had gone through.

Some cynics even offer a different yet thought provoking view. “The whole episode was staged to benefit from the speculation in the stock price of Masood Textile,” says a small-time stock broker. He substantiates his allegation by pointing out that the MSOT stock stood at Rs48 per share before the announcement of the proposed transaction. Afterwards, it shot through the roof. In less than a month’s trading after the announcement, the price rose by a stunning Rs93, or 169pc. The share price — which ultimately hit Rs145 — ended last week at around Rs94.

All that set aside, Masood Textile Mills — a Faisalabad-based vertically-integrated textile manufacturing company with in-house yarn, knitting, fabric dyeing, processing, laundry and apparel manufacturing facilities — is among profitable listed companies. It paid dividends to shareholders at a uniform rate of 15.5pc for each of the last three years (2011-13). Its total assets stood at Rs19.3bn at the close of FY13.

A significant feature of the company’s capital is a mix of ordinary and preference shares, with the later being an extraordinarily big number. A glance at the company’s annual report shows that 34.5m or 87.34pc preference shares have been issued to six major banks — the two highest being 11m shares to UBL and 10m shares to HBL. The remaining 12.66pc preference stock is with the Pakistan Kuwait Investment Company.

Against the paid-up capital of Rs995m, the company held Rs4.11bn in reserves, which produced the break-up value per share of par value Rs10 at Rs51.33. The hefty reserves do not seem to warrant long-term loans. Yet, it borrowed Rs7.59bn in FY13, up from Rs5.09bn in the earlier year, possibly for working capital requirements, explaining the doubling of its financial costs to Rs1.11bn in FY13, from Rs539m five years ago.

During FY13, the company posted a healthy growth of 18pc in sales to Rs23bn, from Rs19bn in the previous year, which directors attributed ‘mainly to an increase in exports’.

With regards to expansion, Shahid Nazir Ahmed, the company’s chief executive officer, says: “Our expansion/balancing, modernisation and replacement (BMR) is a continuing process. Accordingly, the required expansion/BMR was also made during FY13 for enhancing production facilities to meet the requirements of customers”.

It was to make deeper inroads into markets in Europe and Asia. Yet, the energy shortage remains a perennial problem. To address the distressful situation, the company resolves to make an equity investment of Rs200m in its associate company ‘Biomass Power Generation Limited’ for setting up a 12MW biomass-based power plant.

By the end of the last financial year, Masood Textile had invested Rs0.16m in the equity of its associated company and looked forward to make a further investment in the project to a maximum of Rs200m. The CEO points out that for cost-effective production, the company has been operating its steam/thermo oil boilers on biomass to meet the steam and heating requirements during gas loadshedding.

A textile sector analyst, Mohammad Salman, commented that it was a departure from the setting up of coal-based power projects undertaken by most textile and cement companies. “It has to be seen if the procedure followed by the company is more cost-effective than coal-based energy projects.”

Published in Dawn, Economic & Business, October 6th, 2014