Can Kolson survive?

Bankers struggled this week to keep alive the Karachi based company behind one of Pakistan’s prominent food brands “Kolson”, known as KS Sulemanji Esmailji & Sons (Pvt) Limited. Kolson had defaulted on a March 2010 installment on its Islamic Sukuk issue, people familiar with the matter said.

Sukuk are Islamic bonds or certificates that have gained popularity as a form of borrowing, beginning in 2004, as the Islamic capital markets took off with encouragement from the regulators. The State B a n k of Pakistan requires banks to identify and classify non-performing loans on an objective basis if an installment is not paid within 90 days of the due date.

Lotte Confectionery Company Ltd of South Korea, the makers of famous chewing gum brand Spout, was said to be in advanced discussions with the sponsors of Kolson, for the acquisition of majority shareholding in the Pakistani company. However, bankers nervously waited on the sidelines as a formal share-purchase agreement is yet to be signed between the two parties and several key terms and conditions are yet to be agreed.

Lotte Confectionery is the manufacturer of more than 200 products in 70 countries and the third largest chewing gum manufacturer in the world.

A delegation from the Lotte Group, the parent company, visited Pakistan in January this year to seek various investment opportunities, especially in the confectionery sector. The Lotte Group has already invested $500 million in Pakistan through the acquisition of Pakistan PTA in September 2009.

Kolson, a prominent brand in the Pakistani food sector, was established in 1974 and is a market leader in food categories such as pasta, breakfast cereals, snacks, biscuits, potato chips and cakes with famous brands such as Bravo, Katch, Macaroni, Crinkle Potato Chips, Choco Wheelz and Slanty.

The company is a closely held family concern, led by Saifuddin Sistanwala and Murtaza Zainuddin Sistanwala, both of whom could not be reached for comment. Kolson had annual sales of above Rs2 billion in the fiscal year 2009.

The original Rs1.3 billion Sukuk certificates were issued in 2008 to banks and financial institutions, by Kolson, to refinance some of its existing debts from conventional banks, and partially to finance the company’s growth programme. Bank Alfalah Ltd and United Bank Ltd were the lead arrangers for the Sukuk.

Kolson then fell into financial distress in 2009 and the Sukuk investors agreed to restructure the company’s outstanding liabilities, upon request of the sponsors.

As part of this restructuring, the company was expected to make a key approximate Rs150 million milestone payment in July 2010, which itself was in doubt, after the company missed its March 2010 installment of approximately Rs50 million.

The missed March installment has put the banks in a tough position, in the backdrop of increasing NPLs in the industry, since the State Bank of Pakistan’s Prudential Regulations require banks to classify and make provision for such exposures that request for a second restructuring. The company and its bankers held a meeting last week to stave off continued default and discuss the Lotte equity investment bid.

It was thought that a deal with Lotte had a high probability of going through, however, the future role of the family members in the company, along with future cash payments to the existing shareholders, had not been agreed. Any restructuring was thought to include sale of non-productive assets such as the cakes and biscuits business.

It was said that Kolson’s snacks business was where the value lay for any buyer and had double-digit gross profits. If a transaction went through, Lotte was expected to hold 75 per cent shares of the company and the Sistanwala family would hold the remaining 25 per cent, people familiar with the matter said.

Published in The Express Tribune, June 20^th, 2010.