When new ownership came to Flexible Packages Convertors in 2015, the change barely registered beyond the South African packaging industry. The buyer, after all, was a company few in the region had heard of. Packages Limited has always been the towering giant of Pakistan’s corporate landscape and its owner, Syed Babar Ali, the country’s most well-known business personality.
Founded in 1957 the company has become a household name and their product portfolio, mostly packaging solutions, has grown and spread all over Pakistan. It is also the company that became a major reason behind the creation of the Lahore University of Management Sciences, the country’s foremost business school. For decades Packages has been a benchmark. It has been a rare example of a clean, well-run, company that has grown and done so with gusto.
Its acquisition of Flexible Packages Convertors, however, marked something new. This was not just an investment; it was an attempt to push beyond borders and establish itself as a multinational player. But even with decades of experience behind it, the move to South Africa meant entering uncharted territory—and, for all its prestige back home, Packages still had a lot to prove over in Pretoria.
That said, they were poised to do well. The acquisition was made through a joint venture with Omya Group of Switzerland, so they were not going in alone. On top of this, the company has decades of experience in the packaging business, and that too in Pakistan. Comparatively, South Africa is a more stable market, and FPC was a fairly well run company.
Yet somehow the most un-Pakistani of Pakistani companies (we mean this as a glowing compliment) had a typical Pakistani meltdown in 2023, and after facing billions in losses, is set to sell its short-lived position in South Africa.
How bad are we talking? In 2023, Packages recorded a loss of Rs 1.9 billion which was solely attributable to its South African subsidiary. Flexible Packages made a loss of ZAR (South African Rand) 99 million in the whole of 2022 and an additional loss of ZAR 38 million in the first half of 2023. The reason for the loss, according to Packages itself: poor economic conditions in South Africa, lower sales, higher costs and an unfavorable product mix. Due to its ownership of 63.5% of Flexible Packages, the parent company had to record an impairment loss of Rs 68.7 crores in 2022. The situation was made worse by the ban on repatriation and outflow of funds from Pakistan which led to Flexible Packages being put under a restructuring process.
Essentially, Flexible Packages was filing for bankruptcy. Now it was up to the creditors of the company to either sell the company as a running business and then use those funds to pay off the loans or to liquidate the company to do so. Once the deal went through, Packages recognized a further impairment loss of Rs 1.2 billion which had to be incurred as the carrying value of the company was lower than the value it was recording its assets at.
So how come a company with a stellar track record and investment savvy nature end up losing such a large investment in a matter of two years. So much so that the company had to declare bankruptcy? Had the economic conditions really worsened to that degree or was there something else?
Packages goes fishing in international waters
Becoming a multinational is a slow and arduous prospect, particularly when you are starting out in a country like Pakistan. If any company has the chops to make it big, however, it is Packages. And the little adventure in South Africa was not their first dip in international waters. Packages was involved in companies in Syria and Sri Lanka before 2015.
This was not the first time Packages was acquiring an entity outside Pakistan, so you cannot put up what happened to them in South Africa down to inexperience. They started out solidly professional. The company was going to incorporate a Special Purpose Vehicle by the name of Anemone Holdings Limited which was used to acquire 55% shareholding of Flexible Packages Converters (Pty) Limited in 2015. The initial acquisition of $ 8.5 million was funded through a standby letter of credit issued by Habib Bank Limited. The deal between Packages and Habib Bank was secured against a pledge by Nestle Pakistan Limited and the source of debt servicing was going to be from the dividends earned from Flexible Packages. In case there was a shortfall between the servicing and the dividends, Packages Limited was going to cover the gap.
The question here is, was FPC a good buy? Established in 1998 , FPC has been providing flexible packaging solutions to the South African market. It boasted that it was the leading manufacturer and printer of high quality monolayer packing. Flexible Packages was headed by Michael and Wayne Hoffman, and Packages paid a cash consideration of around ZAR 122.5 million or Rs 1.04 billion in order to carry out the deal. Packages was given 83,863,636 shares of Flexible Packaging in exchange for their investment which brought their shareholding to 55%.
This was a nice, clean, company that had made a space for itself in South Africa over 17 years in the exact department Packages had expertise in. FPC was chosen by Packages precisely because of this. For years the company had displayed solid financials, posting consistent and growing revenues and profits. Strategically, this was a prudent move as Packages wanted to expand into South Africa and African markets going forward. Rather than setting up their own plant, they chose to acquire an existing one and expected that once they had a foothold in the continent, they could expand their reach into the rest of Africa as well.
The right call?
In the beginning, it seemed Packages had made a prudent decision. Seven months after acquiring the company, Flexible Packages made revenue worth ZAR 272 million from which it was able to make a profit of ZAR 14 million in 2015. Similar results were seen in 2016 where sales revenue of ZAR 493 million was earned bringing in an after tax profit of ZAR 21 million. The first signs that something was going wrong came in 2017, and even then it was nothing alarming. FPC saw stagnating sales which fell to ZAR 493 million while profit after tax fell to ZAR 15 million.
Still, the loss was chalked up to a recent drive by the new ownership to undertake the training of the company’s existing employees. It was typical of Packages to do this. After all, this is the same company which set up LUMS to train and eventually provide MBAs for people to be efficient managers at Packages.
The year 2018 did see a slight improvement with sales increasing to ZAR 535 million and profit after tax going back to ZAR 21 million. This increase was short lived as revenues hovered at Rs 542 million and profit after tax fell to ZAR 9 million in 2019. The reason for the fall was contributed towards operating expenses which had increased. 2020 saw revenues see a slight increase by going to ZAR 576 million while the company ended up making a loss of ZAR 31 million due to pandemic ravaging the world.
Even though 2020 was bad, the recovery seen in 2021 was nothing short of miraculous as sales increased to nearly ZAR 700 million and the company was able to decrease its losses from ZAR 31 million to ZAR 28 million. The higher sales and loss being made was attributed to the fact that Covid lockdowns were still having an impact on the cost structure of the company.
Not all is well
But things were not as good as they seemed.
There seems to be a bigger and systematic problem which seems to have been either ignored or not dealt with in the right manner. Sources purview to the whole problem dictate a story of incompetence or over reliance on the systems being used by Flexible Packages. Sources allege that the Chief Financial Officer (CFO) had been hired from a telecommunication company and had little experience in production or manufacturing related business. Due to her lack of experience, she relied heavily on the systems being used for inventory management by the company. With little attention to physical stock taking, she monitored the company through the SYSPRO system which was used by the company. Her dictum was that if there is an open order, there should be inventory to cover it and felt there was no need to actually carry out stock taking to validate what was being reflected in the accounts.
This should have already been a cause of concern as the management system being used had already been flagged as being glitchy and had to be corrected in order to fix it. The CFO still depended on the software totally with little regards to the fact that it had been seen as being problematic earlier.
In addition to that, the production manager who was responsible for entering the data into the software also made a mistake where he would enter hours into the system thinking he was entering minutes. So a figure like 120 would be inputted rather than 2 in case of hours. This had an impact on the costing of sales and inventory which was being carried out. As more and more such entries were made, the inventory valuation kept getting inflated meaning the inventory being reflected in the books was much higher than the actual inventory at the plant.
A way to verify the erroneous figures would have been done by the CFO at regular intervals when physical stock taking was carried out. As no such process was in place, this verification fell through the cracks.
As the company’s performance deteriorated, the CEO; Michael Hoffman, was fired and was replaced by someone from Packages Pakistan to steady the ship. This measure did not work out as the problem was chronically plaguing the system and needed to be addressed.
When the first signs of this issue were recognized by the CFO, she communicated this to Packages and told them that an investigation was being carried out to get to the root of the problem. An audit of the inventory management system was carried out to see if the software had developed a glitch again. The vendors of the software reiterated that no errors or glitches were seen.
Once the problem was finally realized in 2022, the best option was to correct for the inflated assets that had been recorded in the books which led to the losses that were seen by the company in 2022 and 2023 as impairment losses. The seeds of these losses had been sown long before and losses which might have been smaller in piece meal ended up accumulating over time and snowballed into losses of billions of rupees.
In short, this was an issue raised due to lack of financial control at the company which was compounded by smaller inefficiencies along the way. A stock taking exercise done earlier would have highlighted this fact and this issue could have been resolved much earlier. As it was not caught, it led to the company making repeated losses.
This lack of accounting control led to bigger problems. First of all, the banks threatened that they would take away their credit facility as they felt that the company would not be able to pay back its loans. As a guarantee, the bank asked the parent company to put up additional investment into Flexible Packaging to make sure it stays afloat.
No problems there. Packages actually wanted to invest more in order to keep Flexible afloat. The only issue? Pakistan had restricted outflow of remittances from the country. This meant that Packages could not put up the investment that was required. This only deepened the crisis as a requirement of $5 million in August of 2022 became $10 million by February of 2023. The business rescue did come in March of 2023 when things had gotten much worse. As the situation deteriorated, it was finally decided to sell the company to a third party in September of 2023. A company that could have been saved did not receive the funding and the company was placed with a BRP who ended up selling the company to a third party.
The numbers take a downturn
How did all of this play out in the numbers? Even though on the surface the company was earning revenues, underneath the surface the situation was looking dire. In the 2021 accounts of Packages Limited, the company cited the fact that economic conditions were deteriorating and that the costs being incurred by the company were rising. Due to this, the investment that had been made was going to be written down.
In accounting terms, it is the goal of the accounts to show a fair and true value of the assets that it has accounted for. This means that if a person has given a loan of Rs. 100 to 10 people, then he can expect that these people will pay him back and he can record an asset of Rs. 1,000 in his books. A few years down the line, one of the debtors passes away. In order to make sure that the reality is being reflected, that Rs. 100 needs to be written off and assets need to be brought down to Rs. 900 in accordance with the facts.
Similarly, the investment that had been carried out by Packages showed that they had invested an amount in Flexible Packages. Now seeing that their expectations will not be met, the company needs to revise the situation and record an impairment loss. This loss is seen as the difference between the carrying value or expected value that will be generated by the business and the value at which the asset is recorded in the books.
This impairment loss was recorded by Packages for the first time and a loss of Rs 68.7 crores was recorded. This was the first sign that things were not as rosy as they seemed. This was confirmed in 2022 when Flexible Packages saw sales revenue of ZAR 545 million which was lower than the amount earned the previous year. Due to this, the company saw a loss of ZAR 78 million compared to ZAR 28 million a year before.
The problem was compounded when the nine month period ending September 2023 showed that Flexible Packages had made a further loss owing to its systemic problems and the capping of outflow of remittances by the government. As investment proceeds could not be sent to South Africa, the company was pushed into further financial distress. The situation called for a restructuring process to be initiated to see the future prospects of the company and whether it was viable. Under South Africa corporate law, a Business Rescue Practitioner (BRP) was appointed who determined that the company was unable to pay its creditors.
A meeting was held with the creditors who had to vote to either let the company be liquidated or be sold as a going concern to a third party by taking it away from Packages Limited. The creditors voted for the company to be kept operational but sold to a third party to meet the debt obligations. The bankruptcy and sale of the company meant that Packages ended up making a loss of Rs 1.2 billion in total.
Even as the investment went sour, the question does persist. What was the reason that the investment went so bad so quickly?
According to official disclosures made by the company, it was seen that the loss was due to economic conditions and the challenges that were being faced. Due to adverse conditions, the company had no choice but to book losses and seek an exit from the company. When Packages was contacted for comments on the reports received, they sent the letter that had been disclosed to Pakistan Stock Exchange intimating the recording of the losses and sale of the subsidiary that was going to take place.
With no other option left for Packages, all they could do was sell the company, write off their investment and record losses in the form of impairment losses of historic proportions. While it is an unfortunate situation for Packages, it is a rare example of the company misstepping. It does not mean they do not have the gas to make it as a multinational company. Especially if they can learn from this experience.
