The privatisation commission board on Tuesday recommended the divestment of 20% shares in Pakistan Reinsurance Company Limited (PRCL) at the minimum price of either Rs22.3 or Rs26 per share and put off its decision on the reserve price for strategic sale of Heavy Electrical Complex (HEC).
The commission board has given two minimum floor rates to the Cabinet Committee on Privatisation (CCOP) for taking a decision, said an official of the privatisation ministry after the meeting. It has recommended setting the minimum price at Rs22.3 per share by giving a 7.5% discount on the three-month weighted average price of PRCL.
The second option is that the minimum floor price should be Rs26 per share subject to the government’s commitment to declare 75% of the after-tax profit as dividend for the next three years. “After deliberations, the board approved the proposed pricing mechanism and recommended it to the CCOP and federal cabinet for final approval,” said a statement issued by the Ministry of Planning after the meeting.
The recommended floor price options are better than the one proposed by the Privatisation Commission. The commission had given three choices to the board. Its first option was to set the floor price at Rs20 per share on domestic comparable. The second option was to set the floor price at Rs22 per share by giving an 8.8% discount on the prevailing three-month weighted average value.
The last option was to fix the price at Rs24 per share subject to the condition that the government would declare 75% dividend as against the existing 55%, according to the officials. Federal Minister for Privatisation Mohammed Mian Soomro chaired the board meeting, which after discussions decided to raise the minimum proposed price.
The privatisation ministry said that various important issues including the approval of a financial adviser for the Sindh Engineering Limited (SEL) transaction, approval of a pricing mechanism for divestment of up to 20% government shares in PRCL and an update on the overall privatisation programme were discussed during the meeting. The government has hired Next Capital Limited, Habib Bank Limited and Haidermota & Co as financial advisers for the divestment of up to 20% shares in PRCL.
The board also approved the appointment of financial advisers for the transaction of SEL, said the privatisation ministry. The board took up another summary for the approval of Rs1.143 billion as the minimum price for selling HEC. But the matter was deferred after the board found that the privatisation ministry had not sought final endorsement of the transaction committee. HEC is engaged in the production of high-voltage electric transformers used by power distribution entities.
It is located in the Hattar Industrial Estate, Haripur on land leased by the Khyber-Pakhtunkhwa Economic Zones Development and Management Company (KPEZDMC) for a period of 99 years. Earlier, an attempt to privatise HEC was made in 2014, however, due to poor response, the process was abandoned in December 2014. In the last attempt to privatise HEC, which was made in March 2015, only one party deposited the earnest money out of three parties and the process became highly controversial.
The PML-N government had decided to sell HEC for Rs250 million but the process was annulled due to many articles in The Express Tribune that raised serious transparency concerns. A newly formed company Cargill Holding Limited had won the bid. The CCOP again placed HEC on the active privatisation list in 2019 to sell the entire government stake of 96.6%. However, many issues remain unresolved that may hinder the smooth privatisation process.
Matters relating to HEC employees’ dues, liabilities towards KPEZDMC, validity of type testing licence and transfer of land located in Taxila presently in the name of HEC are pending for final resolution. The financial adviser consortium has proposed a minimum reserve price of Rs81.08 per share or Rs1.143 billion under the DCF method. The DCF method involves the calculation of present value of future cash flows to be derived from the asset or business in question, by discounting these cash flows at a rate of return, reflecting both the time value of money and the specific investment risks.
Business risks in cash flows and the capital structure are captured in the discount rate. The valuation is based on the assumption that liquidity will be made available to the company for servicing the projected orders. HEC will not be blacklisted from participating in future tenders for the procurement of power transformers by distribution companies on account of non-performance of purchase orders issued in the name of HEC at or prior to the transaction completion date under the sale-purchase agreement.
Given that HEC does not currently possess a valid type testing licence, the incoming buyer can only service existing orders.
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