MANY listed companies are now focusing more on their core activities and shedding off excess fat. Restructuring, rightsizing, divestment and expansion are picking up across the corporate spectrum.

It is a wide-ranging agenda including a cost-cutting exercise to take up the challenge of the survival of the fittest with a simultaneous urge to be ‘big and all-encompassing’.

In the boardrooms, the focus is now seen to be shifting greatly towards the more lucrative energy, food and construction material sectors.

“By venturing into new businesses, companies seek to diversify risks,” says Khalid Mirza, former chairman Securities and Exchange Commission of Pakistan, adding that it is best done by strapping another business vertical to the group.

While diversification and restructuring takes the centre stage, mergers and acquisition activity, a rage some years ago, has taken the back seat. There have been stray cases of corporate marriages but market analysts suggest that such an urge to merge has been piqued as much by choice as from force of circumstances.

In contrast to the earlier policy of allowing expansion in the financial sector, the regulators turned to consolidation. In a bid to reduce the number of banks and non-bank financial institutions (NBFIs) to fewer but stronger entities, the minimum capital requirements were greatly enhanced, which sparked mergers in the financial sector—commercial banks, modarabas, leasing and insurance companies.

Early this month, the Netherlands-based, FrieslandCampina, one of the world’s six largest dairy companies, expressed interest in purchasing 51pc controlling interest in Engro Foods. The deal, if it goes through, would be worth Rs53bn, billed as the largest ever private sector investment by a foreign company.

The transaction is a shade above the 2013 buy-back of shares by Unilever Overseas Holding Ltd, the parent company of Unilever Pakistan. That transaction was worth 400-million-euros, translated into Rs50bn. At the time it was termed the single largest foreign direct investment in the country.

In winter last year, Engro Corporation had decided to part ways with another subsidiary, Engro Polymer and Chemicals Ltd through the sale of its 56.19pc stake. Engro also surprised the market when it announced appointment of advisors for the potential sale of up to 24pc shareholding in Engro Fertilisers Ltd, the chief contributor to the group’s profitability.

Experts suggest that Engro is shedding extra fat to shift its focus on energy businesses. After having invested in the country’s first LNG terminal, it was pushing ahead on its Thar Coal Mining and Power Plant and Sindh Engro Coal Mining Company.

But it is not only Engro that is in the throes of widespread restructuring. The slightest move by the conglomerate comes into view since it stands tall above the rest.

Other noticeable diversification include Fauji Fertiliser Bin Qasim, a subsidiary of Fauji Fertiliser Company, which has ventured into Fauji meat project, acquisition of a 38.25pc stake in the dairy-product producer Noon Pakistan and the setting up of a coal-based power project.

In an earlier restructuring, ICI Ltd—widely known for its paint business, spun off that segment into a separate listed entity, AkzoNobel. And after a change of hands, ICI made its first foray into the food business by participating in the import and distribution of ‘Morinaga,’ a Japanese company’s range of infant formula and nutrition products.

In the energy sector, existing companies are eyeing host of independent power projects in the pipeline and are moving to maintain their share. Earlier this year, Hub Power Company--the country’s first and largest independent power producer (IPP) signed a joint venture agreement with China Power International Holding to construct a 1,320MW imported coal-fired power plant at Hub, Balochistan. “It is likely to come online by 2020,” an analyst reckoned. Meanwhile, Kot Addu Power Company is also looking to set up a 660MW coal-based power project in Sheikhupura, Punjab.

Siemens Pakistan announced its plans to sell off its healthcare business. Even more surprising was the company’s decision to quit its core transformer business. The moves were made under the company’s rightsizing and restructuring programme.

Insurance companies are also looking to diversify. IGI Insurance Company, a unit of Packages group, acquired around 70pc controlling shares of American Life Insurance Company two years ago. The thought behind the move was to secure a footprint in the life insurance business. On the banking horizon, conventional banks without Islamic banking counters have been forced by necessity to either expand vertically into this segment, or more easily, just acquire an up and running Islamic bank.

In the cement industry, where demand has surged and peace among cement manufacturers has given the sector pricing power, many companies are either going into expansion or stepping up buyout activity. Big players are known to be eyeing smaller units. Bestway Cement Ltd clinched the deal for buyout of 75.86pc shares in Lafarge Pakistan Cement held by the parent Safimo SAS, for $218m.

Going forward, large cement companies cherish plans to establish in-house plants to produce packaging bags — a major component of the cost of production. And in order to save up on fuel, they are setting up coal-fired power facilities to switch from costly oil-fired plants.

Multiple cement players have recently announced their intention to expand their capacities given the visible increase in construction activities. With a cumulative capacity expansion of 6.9m tonnes coming from four companies, the total industrial capacity would increase to 51.5m tonnes.

Arif Habib, former chairman of the Karachi Stock Exchange downplays the risk that some people associate with increased capacity. He says that the cement consumption has grown by average 8pc in the last 10 years. The demand looks set to escalate for infrastructure and power projects, particularly those under the China-Pakistan Economic Corridor framework. Arif Habib believes that the entire expansion in capacity would be fully utilized within two years. “It is cost effective for cement companies with infrastructure and financial muscle to launch capacity expansion”, he says. Some cement makers such as Kohat Cement are also aggressively investing in land and property. The company has acquired real estate worth Rs1bn, mainly in Lahore.

With huge projects coming up, steel sits tightly as the king on the throne. Besides the existing mills, more companies are turning to the capital market to mobilise funds for expansions, ahead of surge in demand. Amreli Steels Ltd entered the stock market quickly on the heels of Mughal Iron and Steel Industries.

In order to augment earnings from the teething competition in Insurance underwriting business, companies are putting surplus cash to high-yield investments. Crescent Star Insurance Ltd has signed a letter of intent with The Golden Chick Restaurant—Chicken Tender-Fried Chicken”, a central Texas based US fried chicken chain to set up restaurants in Pakistan. The company also intends to venture into food-franchising, tracking and steel.

So how do the regulators view the expansion and diversification in the corporate sector? Khalid Mirza, also the former chairman of Competition Commission of Pakistan (CCP), says that the Commission has no issue with diversification. “Concentration of economic power and not the managerial power can annoy the CCP”. It was manifest in the Oct 3 approval granted by the CCP to the acquisition of up to 26.67pc shares in Pakistan Refinery Ltd (PRL) by Pakistan State Oil Company Ltd (PSO). The CCP observed that this acquisition would not substantially lessen competition in the market.

Published in Dawn, Business & Finance weekly, March 14th, 2016



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