Ill-timed divestment

02 Sep 2019

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The Privatisation Commission decided last week to initiate the sell-off process for 10 more entities, including three power-sector units and two listed blue-chip companies i.e. Oil and Gas Development Company (OGDC) and Pakistan Petroleum Ltd (PPL).

The Privatisation Commission also released two separate advertisements seeking Expression of Interest (EoIs). The first one was in relation to the appointment of a financial adviser for the divestment of up to 10 per cent shareholding in PPL currently held by the government. The second one related to the appointment of a financial advisory consortium for the divestment of 7pc government-held shares in OGDC.

Both companies are listed on the stock exchange and hold considerable weight in KSE-100 and KSE-30 indices.

For the stock market, the commission’s intent to divest shares of the two companies could not have come at a worse time. The commission already has too much on its plate with 10 entities previously marked for sale. So what was the need for putting more assets, including OGDC and PPL, up for sale?

The government’s decision to sell its shares in OGDC and PPL could not have come at a worse time

Investors breathed a sigh of relief one week ago as the benchmark index recorded staggering gains of 2,585 points (9pc) over the preceding week. That was the best week for PSX investors in 10 years. But hopes of an end to the bear market, which has caused a meltdown of 40pc since May 2017, have been dashed.

Already jittery by the country’s financial malaise, confusion about the FATF ruling and tensions with India, investors fell over each other to dump OGDC and PPL shares. The two stocks lost heavily and dragged down the entire market by their weight as well as the spoilt investor sentiments. “If free-float will be expanded by pushing so many more shares in the market, their availability at a wider discount post-divestment is certain,” said a worried investor.

Six-month average prices of OGDC and PPL are Rs135 and Rs157. Sani-e-Mehmood Khan, former general manager at the PSX, is ready to bet his bottom rupee that the government will not be able to sell at that level.

“The 2014 fiasco seems to have been completely forgotten when OGDC was undersubscribed and the government could fetch only $342 million against the initial target of $830m,” he said.

An official of the commission who asked not to be named said the government aimed to make all the approved privatisation transactions all-encompassing. It will include projects from all sectors, including power and oil and gas. He disagreed that the government had taken up the privatisation issue in haste. He said it was only following the basic rule that it was not the government’s business to do business.

“It takes about four to six months from the initiation of the privatisation process to the close of the transaction,” he said while listing various steps, such the appointment of advisers, due diligence, numerous approvals and the final go-ahead by the cabinet, which must be taken before an entity is put on the auction block.

The commission’s official believed that investors’ nervousness was unfounded. He said that the prices of the two stocks could increase in the four to six months. “But if they do not, the commission is not bound to sell the family silver at throwaway prices,” he added. He asserted that the 7pc stake in OGDC might be up for global offering.

A fund manager said the government must ensure confidence among investors by mentioning the “floor price” below which it will not sell the proposed stakes in OGDC and PPL. The other six entities approved for privatisation include Guddu Power Plant, First Women Bank, House Building Finance Company, Gujranwala Electric Power Company, Nandipur Power Plant and Heavy Electrical Complex. The commission’s official said that 80pc work with regard to the sale of two previously approved LNG plants, which are expected to fetch $1.5-2bn, was already completed.

A research analyst said that 10pc of PPL’s outstanding shares, if sold at Rs107.50 a piece, would bring Rs24bn. Similarly, 7pc of the outstanding shares in OGDC would be worth Rs32.5bn at the current market price. This will result in an aggregate sum of Rs56bn.

The notice seeking the EoI for the divestment of a 10pc government stake in PPL states: “The government through the (commission) intends to divest up to 10pc shares of PPL held by the government to the institutional investors through block sale.”

It meant that there would be no public offer, but a strategic sale to an institutional investor. A senior market participant reckoned that in that case the deal was unlikely to be struck at a considerable premium: what the strategic investor would be seeking was merely a seat on the board of directors.

Published in Dawn, The Business and Finance Weekly, September 2nd, 2019