The clouds of confusion and doubts have finally cleared as K-Electric's (PSX: KEL) sponsor exit is no more a secret after over two weeks of dismissing rumours and speculations. The power utility has announced through a notice to the stock exchange that its majority shareholder, Abraaj Group is evaluating the possibility of divesting its stake in the company.
First of all, exit by Abraaj Group has been long anticipated; being a private equity firm, the sponsor had to divest one day and return gains to the partners in the fund. Abraaj Group together with Al-Jomaih Group of Saudi Arabia and National Industries Group of Kuwait holds the controlling stake of 66.4 percent in KEL under KES Power, the parent company of K-Electric Limited. So, the news has been taken positively by the equity investors, with volumes and price rising staggeringly.
While Chinese state-backed firms, including Shanghai Electric Power and Golden Concord Holdings, are said to be among the potential bidders as per Bloomberg, the odds are in favour of the former, which has formally expressed its intentions to acquire as much as 18.3 billion shares, representing 66.4 percent of KEL.
If the deal gets through, it will be one of the biggest foreign investment deals in the country's history. And if Shanghai Electric Power succeeds in acquiring the controlling stake in KEL, the purchase will be the third major foreign investment this year in Pakistan, dwarfing the $258 million acquisition of Dawlance by Turkey's Arcelik A.S. in June, and Netherlands-based Royal FrieslandCampina N.V.'s acquisition of a 51 percent stake in Engro Foods for an estimated $450 million in July, as per Bloomberg. This could be verified by the fact that based on the recent share price of KEL, the 66.4 percent voting shares in the company have a market value of around $1.6 billion; or approximately $1.46 billion is the estimated deal price by AKD Securities.
Besides the anticipated change in shareholding, the takeover by an experienced power utility is likely to bring in efficiency and growth to KEL. Shanghai Electric Power Co Limited has been investing in overseas market for years, including Turkey, Japan, and Malta. With a strong background in transmission and distribution equipment manufacturing, the Chinese company would clearly add to KEL's strengths.
K-Electric, on the other hand, is also moving ahead with clear growth objectives. The company is expected to deliver double-digit growth over the next three years on the back of continued operational improvement regarding T&D losses. Its future growth projects include BQPS coal conversion, the 700MW coal project, and the much-needed expansion in transmission network. At present, KEL's system demand stands at around 3,056MW against the availability of 2,635MW, while the shortfall is being managed through load shedding. The CEO of the company has recently reported to claim that there would be a 106MW surplus of electricity by 2026 as the demand would reach 5,243MW against the capacity of 5,349MW. He also mentioned that an investment of $1.6 billion has been planned to increase generation capacity of KEL by adding 1,983MW through IPPs, and 2,300MW from external power producers in the system.
Also, a change in sponsor to a Chinese multinational power utility could be ideal with government of Pakistan's shareholding of 24 percent in KEL, as it could turn the tides of disagreement between KEL and the centre.
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