Mergers & acquisitions: Dawood Hercules to sell off fertiliser business to rival

Dawood Hercules Fertilizers will be sold to Pakarab Fertilizers at an undisclosed price.

KARACHI:

The Dawood Hercules Corporation is getting out of the fertiliser business, having announced that it is planning to sell its fertiliser manufacturing subsidiary – at, as yet, an undetermined price – to rival Pakarab Fertilizers. The surprise announcement came via a statement released to the Karachi Stock Exchange on Monday.

The Dawood Hercules Corporation is a holding company that has several other business interests – including a 38% stake in the Engro Corporation. Dawood Hercules Fertilizers is its only wholly-owned subsidiary, but the concern has contributed less and less to the group’s profits every year.

Pakarab Fertilizers is a relatively small fertiliser manufacturer based in southern Punjab, jointly owned by the Arif Habib Corporation and the Fatima Group. Both the Fatima Group and the Arif Habib Corporation have stakes in larger fertiliser manufacturers, including Fatima Fertilizers. The move is likely to consolidate the Fatima Group’s share in the fertiliser business.

Dawood Hercules Fertilizers has the capacity to produce about 456,000 tons of urea, about 9% of the country’s total installed urea capacity. However, the company has only a 3% market share in the overall urea market in the country, owing to constant plant shutdowns.

The company is located in central Punjab, close to Lahore. The location has historically been strategically advantageous, allowing the plant quick access to markets in Pakistan’s agricultural heartland. But its geographical location has also cost the company heavily. In recent years, as Pakistan runs out of gas, the company has had the misfortune of being the farthest away from Sindh – where the main sources of gas are located.

As a result, Dawood Hercules has suffered disproportionately. It has suffered the longest outages of gas supply as compared to any other fertiliser manufacturer. Sources familiar with the matter say that the company’s management has all but given up on any hope of being supplied with gas, after Sui Northern Gas Pipelines executives said that supplying gas to Dawood Hercules effectively makes it difficult to supply gas to Lahore.

It is unclear why Pakarab Fertilizers is interested in buying Dawood Hercules. “Maybe they have some undisclosed information about being able to secure a gas supply soon,” said Naveed Tehsin, a research analyst at JS Global Capital, an investment bank. JS does not cover either Pakarab Fertilizers or Dawood Hercules for its clients.

Sources within the fertiliser sector have pointed to some political factors. Fatima Fertilizers has had among the least number of plant shutdowns among other fertiliser manufacturers in the country. Many in the fertiliser sector attribute the phenomenon to close ties between the majority shareholders of the Fatima Group and the Arif Habib Corporation, and senior members of the current administration.

Akram Durrani, executive director of Dawood Hercules Fertilizers, remains tight-lipped about the matter. He refuses to comment on why the group had decided to sell its fertiliser business; nor on what the possible deal structure may be.

That has not stopped some analysts from venturing an educated guess. Farid Aliani of BMA Capital reckons that the deal is unlikely to include the 102 million shares of the Hub Power Company that the Dawood Hercules Corporation currently carries on its fertiliser subsidiary’s books. The group’s chairman Hussain Dawood has made it abundantly clear that he plans on retaining his stake in Hub Power.

Aliani also notes that Dawood Hercules Corporation currently carries its fertiliser subsidiary on its books at Rs16 per share. It is unclear what the sale price will be for Dawood Hercules Fertilizers, but the market is clearly expecting a gain. Shares in the Dawood Hercules Corporation were up by a maximum 5% in trading on the Karachi Stock Exchange on Monday, closing at Rs36.33 per share.

That gain is likely to be transferred to Dawood’s attempts to acquire and expand the Hub Power Company, in which he is still embroiled in a proxy fight.

Published in The Express Tribune, September 18^th, 2012.