Why Engro sold stake in some of its most profitable subsidiaries

Conglomerate’s strategy to rely on inter-corporate financing despite record low interest rates

KARACHI: Engro Corporation sold more than 28% of its stake in Engro Fertilizers to institutional and high net worth individuals for $185 million on June 8.

A month later, the conglomerate decided to sell up to 51% shareholding in Engro Foods for $448 million.



According to Engro Corp President Khalid Siraj Subhani, the first is the “legacy business” while the second is the “darling business” for the holding company, which is one of the country’s largest conglomerates with annual revenues to the tune of $1.7 billion.

“We needed money because we are investing in power projects. People are reading a little bit more into it… as a business, we keep evaluating from where money can be pulled out and where it can be deployed more gainfully,” he told The Express Tribune in a recent interview.

But why would a corporate giant like Engro Corp sell substantial stakes in some of its most profitable subsidiaries to raise cash for new investment avenues? Isn’t selling profitable companies to divert resources to the energy sector tantamount to killing the goose that lays the golden egg?



After all, it has got a solid balance sheet with total assets of Rs196.3 billion, which is convincing enough for any bank to extend long-term financing.

“Yes, we could have borrowed from banks. Our balance sheet is very strong. (But) we think what we followed was the better approach,” he said while referring to the decision to rely on inter-corporate financing instead of bank borrowing to finance the company’s expansion into the energy sector.

Around five years ago, Engro Corp underwent what Subhani calls “very tough, most stressful period” in the 50-year history of the company. It had set up a fertiliser plant worth $1.1 billion largely using borrowed funds following a gas supply agreement with the government. But the government did not honour its agreement and gas supplies remained sporadic, which hurt the company’s cash flows. To quote from an official statement, Engro Corp faced an “imminent loan default” at the time.



“There is no doubt we had done heavy borrowing. But that was a conscious decision, as we were in the growth mode. Nobody had thought the government would fail to honour its agreement with us,” Subhani said.

Resisting bank loans

But he insists that Engro Corp’s decision to opt for inter-corporate financing instead of bank borrowing in spite of record-low interest rates is completely unrelated to its bitter episode with banks a few years ago.

Engro Corp’s non-current liabilities, which reflect long-term financial obligations, at the end of 2015 amounted to Rs45.8 billion, down more than 50% from Rs92.9 billion in 2010.

But Engro Corp is not the only large, non-financial corporation that has gone for deleveraging in the recent past. According to a research study by SBP economist Talha Nadeem released last month, large Pakistani companies have been paying off their past bank loans since 2009 while resisting the temptation to borrow for further expansion.

By using the debt-to-common equity ratio, the study shows that many large Pakistani corporations have opted for deleveraging in the last six years. They are increasingly opting for inter-corporate financing, which involves a holding company making equity investments in its subsidiaries as opposed to the subsidiary taking out a traditional bank loan.



Through one of its subsidiaries, Engro Corp recently built a terminal in Karachi for the storage and regasification of imported LNG. But it decided to stay away when the government asked for bids to build another terminal. Subhani said media trial of his company and unfair criticism discouraged him from bidding for the second terminal.

However, Engro Corp is now looking at the possibility of putting up a “commercial terminal” for imported gas. Unlike its last project where the government imported gas and the company served only as a service provider, the commercial terminal will have no government intervention. It will operate just like a petrol pump where the company will find suppliers and customers on its own. But it is in the project development stage right now, Subhani said. “We are still studying it. If we decide to go in, it will be a joint venture,” he said.

With regard to the rumour that Engro Corp was eyeing to purchase K-Electric, the company responsible for supplying electricity to Karachi, Subhani remained noncommittal.

“Engro is not involved in the K-Electric transaction right now,” he said. However, he hastened to add that it “makes sense” for Engro Corp to acquire distribution companies. “It is not out of our domain. Whether we acquire a distribution company or not, only time will tell,” he said.

The writer is a staff correspondent

Published in The Express Tribune, August 1^st, 2016.

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