What the Engro Foods deal with Dutch dairy firm means for shareholders

Minority shareholders are likely to see selling stake to FrieslandCampina will be beneficial in the long run

KARACHI: Sponsors of Engro Foods are expected to walk away with roughly Rs49.2 billion following the sale of up to 51% shares in the company to a Netherlands-based dairy firm.

Dubbed as the single largest foreign direct investment (FDI) in recent history, Engro Foods will get Dutch dairy cooperative FrieslandCampina as new sponsor while its current sponsor will continue to retain a “significant” shareholding in the company.



But what does it mean for minority shareholders that currently hold 13% stakes in Engro Foods? What will they gain in the short and long terms following the change in majority ownership?

Engro Corporation, which is the holding company currently owning 87% shares in the foods subsidiary, will keep at least 36% shareholding post-transaction. But Engro Corporation’s shareholding can possibly go up to 42.5% should minority shareholders decide to offload their stakes in response to the mandatory tender offer (MTO) by the Dutch company.

FrieslandCampina is required under the local takeover laws to make an attempt to purchase at least half of the shareholding currently owned by the general public.

The provision is supposed to ensure that minority shareholders also benefit in case the sponsors of a listed company sell their stake in a major deal. This means general investors will also have a chance to avail the public offer extended by FrieslandCampina to sell at least half of their 13% current holding in Engro Foods.

Any number of shares that minority shareholders decide to sell to FrieslandCampina will be adjusted against the shareholding that the Dutch company is supposed to acquire from Engro Corporation.

The MTO will be extended at the highest among the following three prices: Rs120 per share, which is the negotiated weighted average price under the share purchase agreement; the average share price of Engro Foods in the six months prior to the public announcement of the offer; and the average share price recorded during the four weeks preceding the date of public announcement.

In addition, minority shareholders tend to believe - and rightly so - that the foreign investor is going to introduce new products and technology, which will increase the value of Engro Foods in the long run.

However, there is one small detail about the announced deal that has gained little attention so far - something that is going to directly affect minority shareholders of Engro Foods.

In the name of technical assistance fee (TAF), FrieslandCampina and Engro Corporation will take away 2% and 0.5%, respectively, out of annual net revenues of Engro Foods.

This means the two major stakeholders of the company should receive Rs1.25 billion straightaway if Engro Foods generates revenues of Rs50 billion in a given year.

So in addition to getting their rightful share out of the company’s bottom line, the two companies will also receive a substantial chunk out of the top line in the name of TAF. Meanwhile, minority shareholders will take a hit, as earnings per share of the company will suffer.

According to a spokesman for Engro Corporation, Engro Foods expects TAF to be offset by business efficiencies and cost savings, which will be delivered over time and benefit the business.



FrieslandCampina’s TAF covers access to its expertise, including sales and distribution, marketing, procurement, product safety, and research and development, he said. Engro Corporation’s TAF covers access to proprietary know-how and relationships of the wider network, such as the Engro brand name and talent management, he added.

The rate of TAF is consistent within the industry, he said, and in line with precedent cases of multinationals with international partners.

The spokesman for the Securities and Exchange Commission of Pakistan (SECP) said there is no provision in the Companies Ordinance, 1984, that prohibits the payment of technical and royalty fees. “The services may possibly increase the wealth/earning of Engro Foods… it cannot be confirmed that the payment of such fees would be detrimental to minority shareholders,” he said.

Speaking to The Express Tribune, Insight Securities Executive Director Zeeshan Afzal said consumer goods, pharmaceutical, auto, tobacco and cellular companies routinely pay hefty royalty fees to their foreign sponsors every year.  “Other things constant, 2.5% cut in the top line is expected to shave off about 15%-20% from the earnings of Engro Foods in the short run,” Afzal added.

Published in The Express Tribune, July 15^th, 2016.

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