Pakistan Refinery Limited (PRL) and Air Link Communication have issued separate notifications to the Pakistan Stock Exchange (PSX), declaring their intention to acquire control of Shell Pakistan. The two companies have set their sights on jointly acquiring a staggering 77.42% – 165.7 million shares – through an agreement, and an additional 11.29% – which translates into 24.16 million shares – through a public offer.
This translates into a total potential acquisition of 88.71%. In doing so, the two will have not only bought out Shell Petroleum’s share (the 77.42%) in Shell Pakistan but will have also bought out additional shareholders (the 11.29%) to consolidate their position.
“This joint-venture is being spearheaded by PRL. Airlink is our partner, and they will also invest, albeit as junior partners. We have yet to determine the final allocation of the 77% share,” declares Zahid Mir, Managing Director and CEO of PRL.
Does any of this mean that a deal is imminent? “Not at all,” clarified Habib Haider, Head External Relations & Corporate Affairs at Shell Pakistan.
“This is merely an expression of interest, and is part of the process. You may see more local organisations expressing similar interest,” explains Haider. “PRL and Air Link are publicly listed, so even an intention to participate in an acquisition process requires such a disclosure to the PSX,” Haider adds.
Who are Pakistan Refinery Limited, and Air Link?
PRL is a hydro-skimming refinery that processes various crude oils into distilled petroleum products. It is one of five refineries operating in Pakistan, and is a subsidiary of the Pakistan State Oil Company (PSO).
Air Link Communication, on the other hand, is a local smartphone distributor and manufacturer. The company has the rights to manufacture various smartphone brands in Pakistan, including Xiaomi, Redmi, MI, Xcell, Qmobile, Qsmart, Qtab, MAXX, Maxfone, Gionee, X Mobile, and Sparx phones. Additionally, Air Link Communication is the official distributor of Samsung, and Huawei phones in Pakistan.
So, why have two companies that operate in such different industries come together to take over Shell Pakistan?
Why does Pakistan Refinery want Shell?
The elephant in the room for Pakistan Refinery Limited (PRL) is its relationship with PSO. PSO has 63.56% of PRL’s shares, while the Government of Pakistan holds 22.47% of PSO’s shares – according to both companies’ most recent annual financial statements. This essentially implies that the State of Pakistan is acquiring a private company, thereby raising apprehensions individuals may harbour regarding both the transaction and the future operations of the new entity following Shell’s departure.
“The government of Pakistan lacks proficiency in managing businesses for a multitude of reasons and should abstain from meddling in private enterprise,” asserts Yousuf Farooq, Director of Research at Chase Securities. He continues, “The potential acquisition by PRL epitomises the government’s unnecessary involvement in industry.” Farooq suggests, “A more prudent approach would be for the government to take a step back and permit private companies to operate efficiently, resulting in increased tax contributions as these businesses flourish.” Does PRL’s move make sense then?
PRL is convinced it does. “Any oil marketing company (OMC), for instance, because we operate in a regulated environment, confronts two forms of risks that have wreaked havoc on some companies,” states Mir. He elucidates, “One is the security of supply – they lack a reliable source of petroleum. The second is that they are susceptible to certain losses such as exchange losses.”
Mir claims, “These two issues are resolved in our proposal. We have local supply readily available, and PSO’s import volumes are also accessible.” He adds, “When these two factors are available, then the losses incurred in pricing due to PSO’s exchange gain or exchange loss are neutralised. Ultimately, you either have to procure locally or synchronise with PSO. We can do both.
“It’s an impeccable strategic fit. Worldwide, refineries aspire to have an OMC. PRL is the only one which does not have an OMC. Every other refinery does: Parco has Total Parco; Attock Refinery has Attock Petroleum; Cynergico has Byco,” Mir concludes.
One particular advantage for PRL, which their partner Air Link accentuates, is the lubricants business. Acquiring Shell would empower PRL to sell their lubricants directly through Shell’s distribution network. Currently, PSO is PRL’s principal buyer. “PSO has no guarantee over our lubricants. Yes, they consume 40-50% of our products, but they have to vie for them like everyone else for how we allocate it,” elucidates Mir.
Strictly in terms of the PSO connection, Mir states “The new entity will have no relation to PSO. It will have a separate structure, and organisation altogether.”
Why does Air Link want Shell?
Why would a company centred around mobiles desire an Oil Marketing Company (OMC)? Particularly when Air Link has a good thing in terms of their financials.
“Acquiring Shell would introduce a slow-growth business into Air Link’s existing portfolio, potentially diverting the management’s attention from their primary focus,” highlights Farooq. “Air Link’s management might have to raise funds or take on debt to make the acquisition, potentially negatively affecting minority shareholders who have invested in the company for its promising high-growth prospects,” Farooq adds.
“Airlink also sought to diversify, keeping current business trends in line. Thus, we resolved to opt for a diversified portfolio,” declares Muzzaffar Hayat Piracha, CEO of Air Link.
The question of finances
“How will they secure the funds to acquire the shareholding? That is the main question. PRL has cash and cash equivalents of Rs 18 arab ($6.2 crore), whereas Air Link has cash and cash equivalents of Rs 75.6 crore ($40 lakh). How can they finance the acquisition?” probes Mustafa Mustansir, Director Research and Business Development at Taurus Securities.
The question is especially relevant, given that Shell Petroleum wants to depart Pakistan. Mustansir expounds, “The current owners of Shell want to depart Pakistan, as far as I understand. This means they will only be keen on a cash settlement and not willing to go for a share swap with another local company.” They will not only want cash, but they will want this cash to be remitted to them abroad in foreign currency.
Mir exclaims, “It is always feasible to arrange financing from outside of Pakistan. This is about devising a transaction model, and that is a subsequent matter.” He continues, “What will the transaction model be, that is yet to be discerned.”
Mir adds, “Getting financing from outside of Pakistan is not a challenge.” He explains, “What will transpire is that you will arrange to settle the matter abroad. Now Air Link, they have 5-6 companies that are incorporated outside of Pakistan, and they do conduct business outside of Pakistan.”
Given that it’s been striving to conserve every last dollar it can over the past year, would the State Bank of Pakistan (SBP) permit such an outflow of foreign exchange? Piracha states, “Look, when a company like this exits, then SBP always has special provisions. That is not an issue.” He asserts, “And now Pakistan’s foreign reserves are also improving, so those issues will gradually be solved.”
Mir contends that the State Bank does not have any other alternative here. He elucidates, “An outflow is a certainty because Shell wants to leave.” He concludes, “There are only two outcomes here: either the SBP allows for the transaction to materialise and the money is repatriated, or the buyer can settle the transaction abroad through a different company and recoup their earnings as dividends.”
The floodgates are now open
PRL and Air Link have declared their intentions. However, they are not the only contenders. One source Profit contacted declined to comment on the matter because his firm was devising a bid for their client who also covets Shell Petroleum’s stake in Shell Pakistan. PRL and Air Link are aware of the fact that other players are circling. “It’s everyone’s right to make a bid,” states Piracha.
Whilst local players seem to have been galvanised into action, there is still no news on the potential acquisition of Shell Pakistan by Saudi-based firms that were reported in the media since Shell Petroleum first expressed its intention to depart Pakistan.
