Pakistani food-to-energy conglomerate Engro Corp raised PRs19.3 billion ($185 million) on Tuesday by selling more than a quarter of its shareholding in Engro Fertilizers in the country’s biggest-ever block trade by a private company.
In a coup for Pakistan, Engro Corp's sale of shares in its Karachi-listed subsidiary provides further proof that foreign investor interest in the relatively illiquid frontier market is growing and potentially blazes a trail for more offerings.
According to Dealogic, there have been only two secondary block trades in Pakistan worth more than $100 million since 2010. They comprise a $387.9 million block sale of United Bank shares in June 2014 and the $993 million sale of Habib Bank shares in April last year.
But while these two transactions were borne out of government privatisation initiatives, the Engro Fertilizers transaction is the first major case of a private company using domestic capital markets for fundraising, according to the source familiar with the situation.
On Tuesday Engro Corp, which held a 78.78% stake in Engro Fertilizers before the selldown, sold 295 million shares in the subsidiary at PRs65.47 per share -- a discount of 4.2% to the stock’s last close. The stake sold accounts for 22.1% of the Engro Fertilizers’s outstanding shares.
Credit Suisse, which arranged the two government stake sales in United Bank and Habib Bank, was the sole global coordinator of the Engro Fertilizers block trade, while Arif Habib was a co-bookrunner.
Through the block trade, Engro has effectively enlarged the subsidiary’s free float to 43.3% from 21.2% and helped to introduce foreign investors into the company, which was mostly owned by local institutions before the sale.
About 40% of the deal was allocated to foreign investors, according to the source familiar with the situation, underscoring the demand for exposure in the Pakistani stock market even though the company might be less well-known among investors.
Foreign investors have been increasing exposure in Pakistan because it has been one of the best performing emerging markets in the region. Pakistani equities have consistently outperformed the benchmark MSCI Emerging markets index over the past five years, bolstered by a steady acceleration of GDP growth from 2.7% in 2011 to 4.7% in 2014, according to the World Bank.
Ali Naqvi, co-head of Asia-Pacific Global Markets at Credit Suisse, told FinanceAsia that more private companies are expected to raise equity finance as the economy continues to improve.
“Infrastructure and energy would be one of the active sectors for equity fundraising because there will be a lot of infrastructure development under the China Pakistan Economic Corridor (CPEC) programme, which is part of China’s One Belt, One Road initiative,” Naqvi said.
Under CPEC, China will invest $46 billion in Pakistan for the development of infrastructure and energy projects. That is equivalent to 54 times Pakistan's $851 million foreign direct investment inflow in the 2014/15 fiscal year, according to data from the Board of Investment Pakistan.
The CPEC initiatives, together with measures to support the country's key sectors including agriculture and textile, are part of the government plans to further accelerate economic growth to 5.7% for the 2016/17 fiscal year.
Pakistan's benchmark KSE-100 Index is trading at an all-time high at 32,816 points and has gained 14% so far this year.
