Everyone loves a good story of the underdog versus the top dog; David vs Goliath. The following anecdote is not exactly as high stakes, but it does represent a turn in how companies in Pakistan have treated minority shareholders thus far i.e. pretended they do not exist. Now, one company, Merit Packaging, has provided a blueprint for the powers that any minority shareholders can potentially wield against a much larger parent company.
To recall, in October 2020, this magazine had covered the plight of Ahmed Munaf, and his friends. Together his band of roughly 15 to 20 supporters, all who had an excess of 17% shares in the company, asked the Lakson Group: exactly what was wrong with the management of Merit Packaging, and why was the printing company making loss after loss?
Some context is necessary here: The Lakson Group was established in 1954 and is one of the largest business groups in Pakistan. Sultan Ali Lakhani is the co-owner, along with his brothers, including Iqbal Ali Lakhani. The group runs over 15 companies in all sorts of fields: agri-business, call centers, fast food, financial services, media, paper and board, printing and packaging, surgical instruments, and travel. All together the assets of the Lakson Group exceed $1 billion, employ more than 17,000 people, and are present in 50 towns and cities in Pakistan.
However, among those companies, Merit Packaging is not exactly top of the list. It was incorporated on January 28, 1980, and manufactures and sells printing and packaging materials. Between 2015 and 2017, it made sales roughly in the ballpark of between Rs1.6 billion and Rs2 billion. The profit after taxation wildly oscillated, from Rs15 million in 2015, Rs3 million in 2016, and Rs33 million in 2017.
But then, starting in 2018, something happens: total sales increase (reach their highest at Rs2.8 billion in 2019), while the company begins to accrue losses: Rs8 million in 2018, Rs311 million in 2019, and Rs693 million in 2020. Meanwhile, capital expenditure rose in the same time period, along with long-term liabilities; property, plant and equipment; and total capital employed. Additionally, deferred taxation also rose.
In both the company’s 2019 and 2020 annual reports, Merit Packaging pointed out that the losses were in part because “The other major factor is increase in the financial charges due to increase in markup rates and higher borrowings required for CAPEX and working capital requirements”.
In addition, “Full capacity production and sales orders could not be achieved due to slow development of value products on new double coater machine, lower production performance of old offset printing machines in Karachi, at the same time substantial increase in input cost coupled with abnormal market conditions and shifting of Lahore factory to new location hampered the production.”
In the annual general meeting to be held on October 23, the minority shareholders pushed through resolutions, demanding that the management of the company explain themselves, and why they had not managed to achieve their stated target goals. And if the answer is unsatisfactory, then maybe Lakson should consider merging Merit Packaging with another printing mill: Century Paper & Board Mills Ltd [another Lakson company, formed in 1984].
At the time, commentators were not too hopeful of this band achieving their desired result. After all, in Pakistan the family always owns a significant majority to ward off any loss of control, and the concept of shareholder based growth is non-existent.
It was entirely believable that Lakson Group could just ignore the resolutions. Except, the group did not.
In fact, on December 31, the group removed the then CEO, Shahid Ahmed Khan. And on March 2, they replaced him with Amir Ahmed Chapra.
Chapra is a significant choice: he is the former executive director of marketing at Cherat Packaging, Limited, and has worked for 29 years in the packaging space.
According to Suleman Maniya, Head of Advisory at Vector Securities, Chapra had built Cherat Packaging’s flexible business to Rs2.5 billion in the space of two years, while Merit Packaging’s entire revenue was only to the tune of Rs2.1 billion in 2021.
“Merit only needs improved HR, they already have the best machinery along with increasing focus towards production and lowering wastage along with utilising machinery (improved volumes to give a boost to margins and lowering per unit costs) helping it regain competitive advantage.” he specified in a series of tweets.
But the real victory is not about the Merit Packaging and its individual fortunes, and whether or not Chapra can turn around the company. It is about the fact that Lakson Group – one of the largest conglomerates in the country – actually listed to its minority shareholders. This is more in line with companies outside of Pakistan, who follow such procedures. However, in Pakistan, it is easy to ignore, despite SECP regulations that take into account minority shareholders opinions.
But that is set to change, The minority shareholders wanted a new CEO; and lo and behold, they got one. Will there be an uprising in other companies as well? Can minority shareholders influence the seths to make decisions based on their best interest now?
