Engro Foods: Dutch firm buys majority stake for $448 million



Engro Corporation has signed an agreement with a Netherlands-based dairy company for the sale of up to 51% shareholding in Engro Foods at an estimated price of $448 million, a securities filing said on Monday.

Engro Corporation currently controls approximately 87% shareholding in Engro Foods while the general public owns the rest of the outstanding shares. The deal will take place at Rs120 per share, which reflects a discount of about 26% to Engro Foods’ share price of Rs163 last week.

The majority stake in Engro Foods will be bought by a legal entity in which Dutch dairy cooperative FrieslandCampina will hold approximately 80% shares. International Finance Corporation (IFC) and Dutch development bank FMO will hold the remaining shares in the legal entity.

The share price of Engro Corporation rose 1.4% to Rs337.6 on Monday while the stock of Engro Foods shed 5% to close at Rs155.17 per share.

Engro Corporation said in a statement it would stay on as a “significant partner and shareholder” under the new company structure. The stake of Engro Corporation in Engro Foods will likely be around 36% post-transaction.

The Dutch company is required under the local takeover laws to make an attempt to purchase at least half of the shareholding currently owned by the general public.

The provision is supposed to ensure that ordinary shareholders also benefit in case the sponsors of a listed company sell their stake in a major deal. This means general investors will also have a chance to avail the public offer extended by FrieslandCampina to sell at least half of their 13% current holding in Engro Foods.

Any number of shares that ordinary shareholders decide to sell to FrieslandCampina will be adjusted against the shareholding that the Dutch company is supposed to acquire from Engro Corporation.

“With the tender price likely to be lower than the prevailing market price, we don’t expect minority shareholders to sell their shares,” said Topline Securities in a research note, adding Engro Foods is the most actively traded consumer firm in Pakistan and provides minority shareholders with long-term growth potential.

It said the deal at a discount of about 26% was not surprising, as the market already expected a lower price. “The main reason for the Dawood Group (sponsors of Engro Corporation) to sell the stake at a discounted price is to gain FrieslandCampina’s dairy expertise and introduce new products,” it said.

“Engro Foods’ dairy segment consists of only three products that contribute around 90% to the company’s net sales,” it added.

In a statement on Monday, FrieslandCampina said it expected to benefit from the conversion of the Pakistani market from loose to packaged dairy consumption. “At present, less than 10% of tradable milk consumed in Pakistan is processed and offered in packages,” it said.

“The conversion is expected to accelerate in the near future as a result of the growing middle-income class, a desire for higher quality milk as well as the increasing urbanisation,” it added.

Topline Securities said Engro Corporation would generate cash of around Rs47 billion, part of which would most likely be invested in energy-related projects with a higher rate of return.

Engro Foods contributed more than a quarter to the corporation’s revenues last year. Therefore, its sale will result in a decline of around Rs4 per share in the holding company’s earnings, as per workings of Topline Securities.

“However, this decline will be compensated if the sale proceeds are either put in the bank or used to pay off debt. As of the latest quarterly accounts, Engro had Rs72 billion of debt on its books,” it said.

According to Alfalah Securities, Engro Corporation is expected to book a one-time gain of Rs82 per share as a result of the transaction. Consequently, it expects the share price of Engro Corporation to rise to Rs376 per share by the end of 2016 as opposed to the current rate of Rs337.

Published in The Express Tribune, July 5th, 2016.


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