The deal between Pakistan Hotel Developers Limited (PHDL) and the Sindh Institute of Urology and Transplantation (SIUT) for the sale of Karachi’s Regent Plaza Hotel is facing an interesting conundrum. Despite PHDL approving the sale of their main asset to SIUT, it seems market participants are not overly confident that the deal will go through.
News of the deal which would see PHDL sell its crown jewel to SIUT had broken back in late September. The hotel had been valued at Rs 10 billion by the company itself in its last financials, and the sale at Rs 14.5 billion was expected to bolster shareholder value. But despite the announcement of the deal, the share price of PHDL’s stock tells a very different story.
The price of PHDL’s shares has been rising steadily but has not achieved the value they should have. In fact, at the bid price placed by SIUT, the book value of the company should have settled around Rs. 750 per share upon approval. While PHDL’s share price has increased, it has only been fluctuating between Rs 445 and Rs 532 for the last month.
It was thought that since an official nod had not come from PHDL, investors were perhaps a bit shy to put the money in. The recent announcement that the deal is finally going through and has been accepted should have triggered a rise in price moving towards the actual book value of the hotel, closer to Rs. 750 per share.This has not happened and actually the share price moved downwards on the day the announcement of the shareholder approval was made. Why is that?
The background to the deal
Let’s begin with some context. More than a month ago Profit reported on how SIUT was looking to take over Regent Plaza Hotel from PHDL. The topic of that story centered around the fact that before the formal announcements of a takeover were even announced to the shareholders, the share saw unusual movement in volume and price. A call to investigate the matter was made to SECP and PSX to put rumors circulating in the market to rest.
Well to get to the bottom of this mystery, it has to be realized that the stock market in Pakistan is prone to manipulation. Especially in a share as illiquid as PHDL, major participants could act against the herd mentality and take up a contrarian stance. What that means is that while smaller investors would expect the price to increase after an announcement takes place, major shareholders could still ensure that does not happen.
In order to gain the maximum advantage, the smaller shareholders initially keep holding their position expecting the proverbial shoe to drop and the price to increase. After a while, they lose patience and think that the rise will never come. This is the best they can expect based on the lukewarm interest in the market and sell their shares out of desperation more than anything else. This is the moment major players swoop in and take advantage of the situation. This can be one possibility where a game of chicken is being played between the sellers and the buyers. it will take some time for the price to increase if such ploys are being used.
Another possibility in such a situation is that even though both the parties are confident that a deal will go through, market participants are not as enthused as these two. Investors can expect that the deal might break down or might be finalised at a lower price than originally offered. Credible sources have told this publication that Regent Plaza was being sold at only around Rs 4 billion at the end of 2020 and a consortium of investors were considering buying it at this price. This was when the hotel industry was facing a crisis and prices might have been deflated due to that. The source also stated that the investors did not end up acquiring the property as it is in a red zone or close to military installations and there was no approval for a high rise to be made in such an area. Due to these reasons, the source states that the price being quoted seems high.
Based on the reaction of the market, either case can be true and it will take some time to determine what has happened here. Founding trustee of SIUT, Shabbar Zaidi, was contacted to inquire regarding the slow reaction of the market to the announcement and to ask him if the deal was going through or not.
Mr Zaidi did not answer the very direct question regarding whether the deal was going through or not. Instead he asked why he should answer this question.
Profit also reached out to the management and executives of both companies to ask them regarding the status of the deal and whether the figure of Rs. 4 billion stated by the credible source was true or not and if the location of the hotel near military installations was a negative. All of Profit’s queries remained unanswered at the time this report was filed.