After several false starts spanning over many years, the divestment of 10 per cent shares of Pakistan Petroleum Ltd (PPL) by the government seems to be making headway.

Early this month, the board of the Privatisation Commission met in Islamabad with Minister for Privatisation Mohammedmian Soomro in the chair. It discussed the full ambit of privatisation of various government-owned entities. It also deliberated on the divestment of up to 10pc government shares in PPL and up to 7pc of its stock in Oil and Gas Development Company (OGDC).

A statement released by the Privatisation Commission said: “After extensive discussion on transaction fundamentals, market conditions and pros and cons of various options, the board decided: Privatisation Commission (will) proceed for hiring of (a) financial advisers’ consortium (FAC) for (the) divestment of 10pc government shares in PPL.”

Moreover, proposals from the FAC would be obtained for documented as well as undocumented modes of transactions, the process for hiring the FAC for OGDC would commence once the hiring of the FAC for PPL is completed.

An earlier meeting of the board, which was supposed to take place in July, for the sale of stakes in PPL and OGDC was postponed due to a decline in stock prices in the intense bear market. The participants then mulled an option to sell 10pc shares of OGDC (instead of 7pc decided earlier) after reviewing the market situation and a request from the Ministry of Petroleum.

Critics believe the proposed sale should have taken place at the height of the bull market to secure a better price

With the market recovering almost all that it had lost because of Covid-19 in March-July, the Privatisation Commi­ssion was understood to have taken up the task again. The process of transaction structuring would begin after the appointment of the financial adviser was approved and the final nod from the Cabinet Committee on Privatisation was received.

“It is a lengthy process and no one should expect the shares to be sold out and the deal closed in fewer than four months,” said a person privy to the issue. The Privatisation Commission was confident that major local and foreign buyers would be attracted to 10pc PPL shares as it would qualify them for a seat on the board of directors.

The PPL’s Initial Public Offering (IPO) in 2004 is still remembered by some veteran investors with relish. Small investors made a fortune through submitting and striking success on multiple applications for 500 shares. The share value quickly rose to twice the IPO price. The government fetched Rs5.6 billion from the sale of 15pc shares in that IPO. But the 10pc shares to be divested now are being offered in the secondary market. It would take the route of book building, which is criticised by the general public. The global offering is open also to a block sale to one investor or a consortium of investors. “Whatever fetches the best price. Reputed global investors who trot out on shopping for value companies would be considered if they put the right kind of money on the table,” said a person familiar with the affairs.

The paid-up capital of PPL stands at Rs27.2bn in 2.7bn shares of Rs10 each. Free float is 482 million shares. The PPL stock was trading at Rs98.23 last Wednesday. How would the sale of 10pc government-held stake impact the market price of the PPL share? Raza Jafri, head of equities at Intermarket Securities, said stocks were priced according to the fundamentals of the underlying companies. As the performance and financials of PPL have nothing to do with the divested shares, their market price should not receive any long-term negative impact. Mr Jafri said: “Since the number of outstanding shares in the company will remain unchanged, there should be no dilution in the company stock value.” But there could be some short-term ripple since the divested shares are mostly offered at a slight discount over the market price.

There has been some argument over the timing of the divestment. Detractors believe that the sale should have been made at the height of the bull market to secure a better price. Some even question if the family silver or the goose that lays the golden eggs ought to be sold at all. They are exponents of selling off the loss-making entities first. But a person sympathetic to the idea of re-starting the process of privatisation with money-making units argues that it would be churlish to expect any major foreign buyer to come forward and pay a satisfactory price for a loss-making unit with the deficit of billions of rupees on its balance sheet.

PPL holds total assets of Rs476bn. The company earned a stellar profit after tax of Rs50.3bn for 2019-20 on the revenue of Rs158bn. The previous government had divested 5pc shares of PPL in June 2014 at a share price of Rs219. In March this year, the share price had tumbled to Rs69. Critics contend that the government should have sold the 10pc stock when the price was at its peak in 2017. An equity analyst argued that people usually do not account for dividends in calculating the price of a stock. “The current price of the share is dividend-adjusted and, therefore, might be more attractively priced than it was in previous years.”

The sale of 10pc shares in PPL would be the harbinger of good tidings. In mid-2014, the government had sold its remaining 19.8pc shares in United Bank through book building. The deal was struck at $387m and 81pc of the shares were bought by foreign investors. Foreign buyers, including Morgan Stanley, Wellington and Templeton, had shown interest in the bank. But the events were marred by the subsequent crackdown on Pakistan Awami Tehreek’s workers and a political upheaval that put further privatisation deals on hold.

Published in Dawn, The Business and Finance Weekly, September 21st, 2020