Morning Call about – AKBL Deal: Impacts on FFC, FFBL and Arbitrage opportunity!- Arif Habib Limited
Karachi, March 07, 2013 (PPI-OT): As notified earlier to the KSE, Fauji Fertilizer Company Limited (FFC), Fauji Fertilizer Bin Qasim (FFBL) and Fauji Foundation (FF), collectively representing Fauji Consortium, showed its intention to acquire AKBL.
According to Arif Habib Limited as per t he latest financials available, the major stakeholder of AKBL was Army Welfare Trust (AWT), which held 411.17mn shares (50.57%) controlling stake. Fauji Consortium has acquired the entire AWT shareholding (50.57%) in the bank at an agreed price of PKR 24.32/share.
Furthermore, the consortium has now also offered a tender to the general public, amounting to 173.57mn shares (21.23%) at PKR 24.32/share.
New shareholding breakup and cash outflows
As per the KSE notice yesterday, FFC, FFBL and FF will share stake in AKBL with the ratio of 60%, 30% and 10%, respectively. Total cash outflow for the transaction will be PKR 14.22bn by the Consortium. The expected outflow of FFC and FFBL is calculated to be around PKR 8.5bn and PKR 4.3bn, respectively.
|Fauji Consortium||FFC||FFBL||F Foundation||Total|
|AKBL Shares (mn)||351||175||58||585|
|Acquisition PKR bn||Outlay||Outlay||Outlay||Outlay|
|Price @ PKR 24.32/share||8.53||4.27||1.42||14.22|
Source: KSE Notice, Arif Habib Research
FFC, FFBL’s financial position post-transaction
As per CY12 financials, both FFC and FFBL have adequate cash on their books to fund the aforesaid transaction.
However, since both the companies require sufficient working capital to support their seasonal sales, Arif Habib Limited therefore believe both the companies would raise additional debt for the transaction.
Arif Habib Limited views also stems from the fact that lower interest rate scenario makes it feasible for both the Faujis to fund the deal through additional borrowing.
The expected cash and equivalents of FFC and FFBL, even after the execution of the transaction, would be around PKR 6.6bn and PKR 3.9bn, respectively (see the table below), however, excluding the short-term finances should leave only FFBL requiring additional liquidity.
|Operating cash flow||18,646||1,443|
|Cash and bank balances||3,749||8,789|
|Short term highly liquid investments||17,812||1,550|
|Cash and cash equivalent||21,561||10,339|
|Cash position adjusted for 4Q dividend||15,201||8,237|
|Total cash outflow for AKBL||8,532||4,266|
|Expected cash balance post-transaction||6,669||3,971|
|Cash position excl. short term financing as of CY12||1,679||(1,650)|
Source: Company Account, Arif Habib Research
As far as earnings impact of AKBL on both the Faujis is concerned, assuming equity method treatment by both the companies for AKBL stake going forward, a cash dividend of PKR 0.5/share by AKBL ahead should yield a marginal impact on FFC (+0.8%) and FFBL (+1.3%) earnings according to their specified stakes in AKBL.
Arbitrage opportunity offered!
Arif Habib Limited believes the deal price for AKBL’s transaction that the Fauji Consortium has tendered to the general public should yield a short-term arbitrage opportunity. On a rough-and-ready basis, Arif Habib Limited has run a return sensitivity on a various post- transaction expected market prices of AKBL.
|Return sensitivity for AKBL||Amounts in PKR/share|
|Selling price in Market||19.00||18.00||17.00||16.00|
|*Average Selling Price||21.66||21.16||20.66||20.16|
|Annualised Gain (Assuming 90 days for transaction)||45%||35%||24%||14%|
Source: Arif Habib Research
Assuming 50% shares accepted at Tender Offer
At a 50% acceptation rate of the tender shared among the public, and post selling price ranging from PKR 19/share to PKR16/share, a range of returns between 3% and 11% (14% and 45% annualized) may be expected, barring any opportunity cost on the funds invested.
In this regard, at yesterday’s closing price of PKR 19.4, AKBL is currently trading at a PB of 0.7x compared to the industry’s average PB of 0.8x. As far as FFC and FFBL are concerned, Arif Habib Limited has a ‘Hold’ stance on both the scraps.