The Azgard-9 Limited has declared issuance of right shares of 210 percent to fund the purchase of Pak American Fertiliser Company's stake for Rs 16.11 billion.
The company in its board meeting decided to issue 210 right shares for every 100 ordinary shares held by the shareholders at Rs 21.95 apiece. The main purpose of issuance of right shares is to use the proceeds against the purchase of Pak American Fertiliser.
Last week, the Cabinet Committee on Privatisation approved the sale of Pak American Fertiliser to Azgard-9 Limited and the Jahangir Siddiqui Securities Limited for Rs 16.11 billion. The group was the second-highest bidder after Ibrahim Fibre, which offered Rs 20 billion for 95 percent of Pak American on February 28.
The Ibrahim Fibers failed to pay the first instalment on time and retained Rs 350 million deposited or earnest money by the company.
The Azgard-9 announcement of right shares would help raise Rs 4.028 billion through equity while rest means 75 percent would be the debt. The Azgard-9 through its announcement to the Karachi Stock Exchange on Thursday also gave financial projection for the next two years. The company expects that its profit in next two years would rise to Rs 2.788 billion from Rs 859 million of FY06. Similarly, the sales would shoot up to Rs 19.434 billion from Rs 9.302 billion.
"We think that the diversification of Azgard-9 into the fertiliser industry is a good move", said Suleman Amir Ali, research analyst at Investcapital Securities. First, because of the attractive dynamics of the fertiliser industry, and secondly, and more importantly, the balance which it provides to its current risky textile business. The lower risk and stability of the fertiliser sector will thus help in reducing the overall risk of the company.
However, the real question is whether the company overbid for the project. For assessing that, we have compared the per ton cost for Pak American with a new state-of-the-art urea plant, which Engro has proposed to set up.
THE FOLLOWING TABLE PROVIDES THE COMPARISON:

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                 Cost            Capacity       Cost          US$
                                               Rs/ton        /ton
Pak American     16,110           383,250      42,063         701
Engro            42,000         1,200,000      35,000         583
=================================================================

Although the per ton cost for Pak American is coming out to be higher than Engro's new plant, the following factors help justify the slight premium:
First, the feed gas price for Pak American is lower at Rs 36.77/mmbtu as compared to Rs 82.05/mmbtu for others. Secondly, the purchase of Pak American also includes 11,481 kanals land. Thirdly, the plant is currently fully operational and running, whereas setting up a new plant would have a lead time of at least 2.5-3 years.