AKD Quotidian about — LUCK: Acquisition of ICI Pakistan Ltd.

Karachi, July 31, 2012 (PPI-OT): As per notices issued at the Karachi Stock Exchange (KSE), the Yunus Brother Group has jointly signed a share purchase agreement with ICI Omnicron B.V. for the acquisition of a 75.81% stake (70 million shares) in ICI Pakistan Ltd. at a bid value of US$152.5 million (PKR 14.3 billion at the mid exchange rate of PKR 94.18/US$ on Jul 27’12).

According to AKD Securities, this translates into an acquisition price of PKR 205.1 per share of ICI. Within the Yunus Brothers Group, Lucky Cement has the highest share at 51% of the acquisition (35.7 million shares) where AKD Securities believes financing would be a mix of debt and equity. The deal will be subject to certain adjustments based on lock-box mechanism for cash and indebtedness where AKD Securities believes this likely deal with the payables to Akzo Nobel Pakistan Limited at PKR 3.6 billion. In this regard, white last declared (Mar 31’12) cash balance for ICI stood at PKR 2.8 billion, the company issued a notice at the KSE on Jut 13’12 informing about payment of PKR 2.0 billion to AKZO (PKR 1.6 billion still outstanding). The group may also have to acquire further 11.17 million shares through a tender offer in accordance with Companies Ordinance 2002 (Substantial Acquisition of Voting Shares and Takeover). At current levels, AKD Securities is placing LUCK under review pending details of the transaction, particularly the financing structure to be adopted by LUCK.

LUCK – likely to finance through a mix of debt and equity: As per details released thus far, LUCK will be acquiring the largest chunk of ICI at 35.7 million shares (51% of the transaction size). At PKR 205.1 per share, this translates into an investment size of PKR 7.3 billion for the company (PKR 14.35 at group level) where AKD Securities believes the investment will likely be carried through a mix of debt and equity financing (rights issue). Pertinent to mention LUCK currently has just PKR 627.9 million in cash balance while its Debt / Asset and Debt / Equity ratios stand at 9.3% and 12.4%, respectively, significantly lower than the industry average.

Synergies – Group rather than company level: The most obvious synergy for the group will be coming from the PSF business which will facilitate downward integration for its textile businesses (Gadoon Textile and Yunus Textile). The other big ticket ICI division ‘Soda Ash’ is currently in the process of installing coal fired boilers at its plant, which would provide insulation from gas curtailment and could sharply boost ICI earnings going forward where the company will be looking to ramp up its utilization levels to near 100% from the current -80%. Excess production will likely be exported to destinations similar to LUCK’s cement export market, in AKD Securities’ view.

Further tender offer on the cards? As per Listed Companies Ordinance 2002 (Substantial Acquisition of Voting Shares and Takeovers), any company acquiring higher than 25% stake has to issue a tender offer for acquisition of the remaining (free float) shares at or above the acquisition price. With the group level transaction at 75.81% of total outstanding shares, (exceeding the required 25%), the group will have to issue a tender offer for about 11.17 million shares (50% of 22.34 million remaining shares).

Investment Perspective: The market has reacted negatively to the acquisition with LUCK’s share price closing in on its lower lock yesterday before recovering. Given the acquisition price, the probability of management skipping cash dividend with full-year FY12 results remains high. AKD Securities believes the company will likely go for a bonus payout with FY12 results along with a rights issue for raising a portion of its financing requirement. Should LUCK opt for complete debt financing, it will increase the company’s D/A to 22.7%. Currently, AKD Securities is placing LUCK under review pending details of the transaction, particularly the financing structure to be adopted by LUCK.