Impasse persists in stalemate over Suzuki’s delisting

The last we left the buyback saga of Pak Suzki, a buyback price had been set by the Pakistan Stock Exchange (PSX) and Pak Suzuki was going to accept the price that was set. This was going to be a smooth process. But then there was a twist in the tale. 

Nadeem Nisar, a substantial shareholder, had announced to the PSX that he had amassed more than 10% of the shareholding of the company. Under the PSX regulations, a company needs to cross the threshold of 90% in order to make the buyback successful. It seemed that Nisar was going to end up holding all the cards and would be able to chart the course of the future of the buyback.

Since then, Nisar has been able to create a block of shareholders who now hold a total of 15.39% of the shares of the company which means that Pak Suzuki will not be successful unless this block sells at least 5.39% of their shares, thereby increasing Suzuki’s holding to the 90% threshold.

And now it seems its task has become even more difficult. Sensing that Pak Suzuki will go through the formalities of accepting the price set by PSX of Rs. 609 per share, the block has decided to show their dissatisfaction with the price and the process being followed. In a scathing letter sent to PSX on 29th of January 2024, Pak Suzuki and the Securities and Exchange Commission (SECP), the shareholders have said that the whole process of delisting including its manner and procedure are a huge cause of concern. 

The letter states that they formally reject the delisting proposal and the price that has been set by the PSX. They have given a point by point justification for rejecting the price. The shareholders, under the leadership of Nadeem Nisar, feel that the interests of the shareholders are not being looked after and that they allege the company has been operating in an unlawful and oppressive manner over the last few years. 

They have done so by siphoning off billions of rupees from Pak Suzuki to the parent company and are now trying to evade accountability by carrying out the delisting at a very low price.

In addition to that, they allege that through different pricing mechanisms like transfer pricing, discounts, commissions, royalty and technical fee, a significant portion of the profits that should have come to the company have been diverted to the parent company which has led to losses for the company in Pakistan. Due to these losses, the company has seen a devaluation in its share price.

Transfer pricing occurs when goods or services are exchanged between divisions of the same company. It’s like one part of the company doing business with another part. A transfer price is based on market prices, similar to what would be charged if the transaction happened outside the company. Companies use transfer pricing to reduce the overall tax burden of the parent company. They may charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.

Suzuki, however, started to see an improvement in its financial performance from 2023 which was reported as losses earlier. This coincides with the change of the auditors potentially pointing towards more transparent financial reporting as per the aggrieved shareholders. There were attempts made on the part of the shareholders to ask the company to revise its earnings per share reported for previous years in order to reflect the actual performance which had taken place. In the past, related party transactions with the holding company had been used to show losses. 

Based on the most recent performance, the shareholders feel that using price multiples, the price of the delisting is understated and should be revised upwards while no business plan or annexures have been shared by Pak Suzuki or PSX to rationalize the valuation that has been determined.

The price to earnings multiple approach is derived from the recent earnings of a company and the price to earnings multiples of similar companies in the market. This approach aims to determine a reasonable market price. However, due to the economic turmoil that Pakistan has faced in the past two years, these multiples have decreased significantly across various industries. As a result, they may not accurately reflect the actual value of companies once the economy starts recovering.

The shareholders alleged that the recent EPS of Rs 39.36 per share and Rs 46.24 per share for the last two quarters respectively show that the company was improving its performance and this has been disregarded which led to the undervaluation of the delisting price.

In light of their shared concerns, the shareholders requested the company to not hold its Extraordinary General Meeting (EOGM) on February 9th 2024 to vote on the delisting and to take necessary actions in order to correct this wrong. In addition, PSX and SECP were asked to meet their regulatory duties and protect the interest of the shareholders in regards to the issue raised. 

As reported earlier, once PSX decides on a price, it is considered binding and final and that has to be followed. That is the limit to which the PSX can step into this situation. On the other hand, the company will try to pay as little as possible as it is financially prudent for it to do so. Lastly, the holding that was collected by Nisar went as high as Rs 877 in the market and he would want to be compensated accordingly as he had bought shares in the market at a price which he saw as justified based on his assumption and analysis.

Since this letter was sent, no correspondence was received by the shareholders. As a part of its media strategy, the shareholders have sent another letter to PSX, SECP and the company on 6th of February 2024. Even though the letter was received by the exchange, it still hasn’t been made public as it was received near the end of business on the 7th. The letter has not been posted in the morning of 9th when this should have taken place. 

In the new letter, the shareholders have provided their own estimation on the share price which should be proposed which was carried out by independent valuators, analyst appraisals and recent market trends. Based on these valuations, the letter claims that using market metrics, the price should be between Rs. 925 and Rs 4,799 which considered latest quarterly earnings, price to earning ratio and other comparative transactions that had been carried out in the past. The publication asked the representatives of the shareholder to provide the mentioned Annexure B for the calculations which has not been provided.

In addition to that, based on the last three Multinational Companies that had been delisted, the shareholders claim that the delisting price should have been Rs. 12,704 based on the average PE ratio of the companies. They have attached an Annexure C to justify this valuation which has not been provided to this publication as well.

The letter again alleges that the company was involved in financial mismanagement and unlawful practises which are against the interest of the shareholders and there was no participation of the shareholders in determining the price of the delisting. They also state that valuation of the company was done with no regard given to a business plan, goodwill determination and there was a lack of transparency in the delisting process.

Goodwill, in terms of business valuation, represents the intangible value and reputation of a company. It is an asset that is not easily quantifiable and is often associated with factors such as brand recognition, customer loyalty, employee expertise, and relationships with suppliers and stakeholders. 

The Shareholders attached an analyst report by a corporate brokerage house of Aba Ali Habib Securities (Pvt) Limited which has not been provided to check for veracity to the publication as well. 

The aggrieved group is now asking for the SECP and PSX to step in and investigate the whole process by which the delisting was carried out and provide transparency in the whole process which has been lacking from the start.

Even though objections had been raised, it was evident to the shareholders that EOGM was going to be held on the 9th February 2024 as planned which was disregarding any earlier issues raised. 

Something that has been highlighted by this publication since the beginning is the fact that the valuation process and the annexures are not made public. The company’s valuation, the valuation by the PSX and now even the valuations done by the shareholders cannot be accessed by the market themselves. Much of the mystery behind these numbers will end once these valuations are released. Sunlight will prove to be the best disinfectant in the case of misinformation and undervaluation.

In terms of the role of each of these parties in the future, the company will try to get as many votes as possible at Rs. 609 and try to make this buyback successful. The PSX has done all that it can do and now has given a price which is final and binding. The shareholders will stick to their guns and not sell at a lower price, as stated by them, and wait out a whole year to make the buyback unsuccessful and get a fairer price. PSX cannot even do anything about the price as its regulations do not allow it any room in this regard.

There can be an exception made in this case with SECP, shareholders, company and PSX coming on board to revise the valuation that was done earlier and given a one time exemption to this buyback. This will allow for the price to be revised upwards and deal with the impasse in an amicable manner. Another way could be that the shareholders, under the guarantee of a third party, cut a deal with the company and circumvent the PSX to transfer the shares at a higher price. This will make sure that the buyback is successful while solving the problem by saving time and resources of both sides.

The media blitz that has been launched by the shareholders might be a move in that direction where they negotiate with the company and this tactic of sending letters to the PSX could be a move to put pressure on the company. As things stand, something has to give before the situation can be resolved. In case the company is not willing to play ball, it can be expected that Nisar and his block will keep sending letters to PSX to get the company to come to the negotiation table.

The planned EOGM of Pak Suzuki was held on the 9th of February and the motion was passed to carry out the buyback at the price set by the exchange. However, it seems that the shareholders have raised their voice to the company. Videos from the EOGM have come out showing shareholders lambasting the company for short changing them and giving them a low price for their shares. With the company having no regard for the minority shareholders, it seems this saga will continue long into the future. The shareholders will only become more stringent in their opposition to the move as they see that the company is not willing to budge from their stance.

The problem still exists as there is little Pak Suzuki, shareholders or PSX can do in the current situation other than stick to their guns. Unless negotiations are held, nothing is going to change for the foreseeable future.