The Abraj Group has announced to divest its 66.4 percent shareholding in K-Electric to Chinese state owned Shanghai Electric Power Company (SEP) for a consideration of $1.77 billion.
"Abraj Group's controlled company, KES Power, has entered into a definitive agreement to divest its 66.4 percent shareholding in K-Electric to SEP for a consideration of $1.77 billion," a statement issued by Abraj Group on Sunday said.
Analysts said this one of the largest transactions in private sector in Pakistan will help boost investors' confidence in spite of political noise.
"This landmark deal proves that Pakistan is on the path of recovery and offer attractive return to investors", Muhammad Sohail, CEO of Topline Securities said. After this deal many big tick merger and acquisition deals are likely to occur in future, he added.
SEP is a state-owned enterprise controlled by State Power Investment Corporation, a Fortune 500 company. Listed on the Shanghai Stock Exchange, it is mainly responsible for the power supply of Shanghai, with generation of 35.23 TWh in 2015, the Abraj statement said.
Incorporated in 1913, K-Electric (the Company formerly known as Karachi Electric Supply Company) is a publicly listed fully integrated power utility involved in generation, transmission and distribution. The Company was privatised in 2005 and Abraaj took a majority stake in 2009 through its Funds. K-Electric has exclusive distribution rights for Karachi and its adjoining areas, serving 2.5 million consumers. Abraaj's investment into K-Electric was predicated on the burgeoning growth of the power sector in Pakistan, an enabling policy and investor-friendly environment that encouraged private sector participation, and critically, the ability of Abraaj to transform an under-utilised strategic asset into a leading Asian energy player.
Over the course of Abraaj's investment and through an active ownership model, the Company has successfully achieved a landmark turnaround. Operationally, K-Electric has upgraded installed generation capacity by adding over 1,000 MW with overall efficiency levels improving from 30.4 percent in 2009 to 37.4 percent in 2016, thereby significantly contributing to the financial performance of the business. The Company was successful in reducing transmission and distribution losses by over 12 percentage points. K-Electric additionally focused on enhancing the reliability of the transmission network through the addition of 12 new grid stations and by augmenting old and building new power lines which resulted in increased transmission capacity of 768 MVA. In 2012, K-Electric recorded a net positive income for the first time in 17 years and since then has continued to generate positive financial metrics on a year on year basis and demonstrated sustained growth.
With Abraaj's support, a performance based culture was established in the Company by both attracting multinational and local management talent and in-house talent development, including establishing the largest management trainee program in the country. Additionally, the business has become well-recognised for its customer service focus.
Abraaj further introduced environmental, social and corporate governance enhancements in the business which resulted in the Company being awarded an 'A+' rating from the Global Reporting Initiative, a first for a Pakistan utility company at the time. The Company has focused on health and safety initiatives in the workplace which resulted in a 67% reduction in employee accidents and a 73% reduction in damaged assets. As part of a 360 degree stakeholder engagement program, K-Electric provides free, uninterrupted and subsidised electricity to 13 healthcare and educational institutions. Additionally, its social and community partnerships embrace stakeholders across many segments of Karachi's civil society.
Commenting on the exit, Arif Naqvi, Founder and Group Chief Executive, The Abraaj Group, said: "Abraaj fully recognised the outstanding growth opportunity that K-Electric represented for the power sector in Pakistan when we made our investment in 2009. Over the past seven years, we have worked very closely with the management and staff at K-Electric to catalyse that potential and achieve real and tangible value for the business, its consumers, and the city of Karachi at large. This is symbolic of a successful public private partnership model where the Government of Pakistan is a core stakeholder".
"Today marks a milestone in that partnership as we enter into a definitive agreement to divest our stake in a high performance business and market leader to a strategic buyer who is fully committed to continuing this success story into the future. At Abraaj, we remain focused on the standout opportunity that Pakistan and wider Asia presents to us and we look forward to identifying, growing and building regional champions as a core part of our investment philosophy".
Commenting on the transaction, Wang Yundan, Chairman of SEP, said: "The signing of the definitive agreement is a result of collaborative efforts of both the Abraaj and SEP teams. SEP appreciates what Abraaj has achieved at K-Electric over the past seven years and recognises the performance and capability of K-Electric's management team. SEP will leverage its own strengths as a strategic investor and further realise K-Electric's potential to provide better services to the people of Pakistan and the Government of Pakistan. SEP is confident about working together with Abraaj in the future to transform K-Electric into one of the best companies in Pakistan. The K-Electric transaction only marks the beginning of SEP's cooperation with Abraaj and we look forward to further collaboration between the two parties in many other areas in the future."
The Abraaj Group has been present in Asia for over a decade and deployed c.US $1.5 billion to date in a range of sectors including healthcare, education, utilities, e-commerce, logistics, consumer goods, and food and beverage.
The transaction will close once customary closing conditions and requisite regulatory approvals are obtained, the statement said.
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