In a surprise development, Mega Conglomerate’s plan to acquire 87.5 percent majority stake in Dewan Cement seems to have collapsed.
According to a cover story in Profit, the deal is said to have collapsed after Dewan Mohammad Yousuf Farooqui Chairman Yousuf Dewan Companies rejected the offer of Mega Conglomerate to acquire a majority stake in Dewan Cement.
The offer was rejected after the due diligence exercise accessed that Dewan Cement’s ‘enterprise’ value was Rs27 billion, which was below the initial offer made by Mega Conglomerate.
This was revealed in a letter sent on April 21st by Mega Conglomerate Executive Director Aly Khan to Farooqui, which was seen by Profit.
The letter stated “This is due to the fact that historically DCL plants have produced much less than their rated capacities… As such, heavy investments are required to rehabilitate both of the company’s plants. noting that even the Rs27 billion enterprise value was “well above” the actual estimate furnished by the due diligence team to reach a workable solution for both the buyer and the seller.”
The final enterprise value assessed by the due diligence exercise wasn’t significantly lesser than the Rs28 billion which Farooqui had expected.
However, after making ‘adjustments’ and accounting for long-term liabilities and contingencies, the net asset value came to Rs15.26 billion. This means the 75 percent stake owned by the YD Group in DCL would amount to Rs11.45 billion.
Farooqui turned down the offer.
However, Dewan Cement’s spokesperson has claimed the negotiations are still going on and the deal could be salvageable.
There has been no formal announcement on the stock exchange by Dewan Cement about the status of the deal.
In his response to Khan on April 30, also seen by Profit, DCL Director Haroon Iqbal wrote that Mega Conglomerate had indicated that the enterprise value would be around Rs24 billion, with a possible revision of Rs1 billion either upwards or downwards because of the due diligence exercise.
But the post-due diligence offer by Mega Conglomerate was not acceptable to DCL for being too low – the sponsor of DCL apparently was not getting the kind of money it expected despite a higher enterprise value.
The share price of DCL was Rs22.75 on April 30, the day the company turned down the offer.
Ironically, the decision by Farooqui to walk away from the deal was against the advice of Next Capital CEO Najam Ali, the sell-side adviser appointed by the YD Group itself.
It should be noted that the appointment of Ali as the adviser by the cement maker needed formal approval of his mandate by banks who expected to recover Rs6.1 billion from the Mega offer.
Next Capital reviewed the Mega deal along with all other offers that DCL received in the past. It concluded that the Mega offer was better than all the past ones.
Next Capital highlighted a number of reasons in its report, viewed by Profit, for the YD Group to go ahead with the offer. For example, it said the offer was tax efficient. The sponsor and other shareholders would get funds on a tax-free basis as opposed to the past offer by Bestway Cement, which involved a heavy tax on capital gains.
It also highlighted that the settlement of bank liabilities would be swift under the Mega deal because its structure required fewer legal procedures.
The share price of DCL started surging as soon as the word spread about a new investor showing interest in acquiring DCL.
The share price had increased almost 54 percent to Rs27.69 on February 1 when Mega Conglomerate, a group of companies operating in cement, logistics and real estate amongst other sectors, expressed its intention to acquire a substantial shareholding in DCL. DCL informed the stock exchange that Mega Conglomerate would soon start due diligence, a comprehensive appraisal of a business by a potential buyer.
The DCL share price touched Rs19.67 on May 11, down 13.5 percent from April 30.