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Morning Call about – AKBL Deal: Impacts on FFC, FFBL and Arbitrage opportunity!- Arif Habib Limited

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by March 7, 2013 Brokerage

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 ConsortiumFFCFFBLF FoundationTotal
Stake holding60%30%10%100%
AKBL Shares (mn)35117558585
Acquisition PKR bnOutlayOutlayOutlayOutlay
Price @ PKR 24.32/share8.534.271.4214.22

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 flow18,6461,443
Cash and bank balances3,7498,789
Short term highly liquid investments17,8121,550
Cash and cash equivalent21,56110,339
4Q dividend6,3602,102
Cash position adjusted for 4Q dividend15,2018,237
Total cash outflow  for AKBL8,5324,266
Expected cash balance post-transaction6,6693,971
Cash position excl. short term financing as of CY121,679(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 Market19.0018.0017.0016.00
Tender Offer24.3224.3224.3224.32
*Average Selling Price21.6621.1620.6620.16
Purchase Price19.5019.5019.5019.50
Expected gain11%9%6%3%
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.


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