Governemnt expects to raise $550-$750m from PSO sale

ISLAMABAD: The Pakistan government is expected to raise $550 million to $750 million from the sale of its 51 percent stake in the country’s largest oil marketing company, Pakistan State Oil Company, which is scheduled to be auctioned off April 26.

A Dow Jones Newswires survey of privatization sources and analysts puts a price range of $6 to $8 a share for the stake.

The list of potential bidders, finalized by the Privatization Commission, include Pakistan’s Fauji Foundation, Kuwait Petroleum Corporation and Saudi Arabia’s Midroc Holding.

“They’re selling a gold mine if you take into account the leading position PSO enjoys in the oil business. I think this price range is realistic,” said Hina Akhlaq, Vice President of Pak-Kuwait Investment Co., which has one of the largest institutional holdings in PSO. Hina estimates $6 a share is a minimum value the government might target.

PSO, with a 70 percent market share of domestic petroleum sales, is a bellwether on the Karachi Stock Exchange’s 100-share index.

The company’s net profit rose five fold in the first half of its current fiscal year ending June 30 to Rs 2.065 billion.

Analysts expect net profit of around Rs 4 billion for the full fiscal year, up from Rs 3.1 billion in the previous financial year, due to higher oil prices and increasing demand for fuel.

The government owns 26 percent of PSO and another 25 percent stake indirectly through state-run mutual funds. The remaining shares are publicly held.

PSO’s share price nearly tripled over 2002 on a privatization-led rally and in a generally upbeat market. Monday, it closed at Rs 185.80, down 2 percent from the previous close.

A former official at the Privatization Commission said the market price of its shares has little significance for evaluating asset value.

“We don’t take the market in this process too seriously because it can be very erratic,” he said. “We rather take the future earnings potential of an asset and a possible discount investors are likely to attach while investing in Pakistan.”

The Privatization Commission tries to get a price closer to its current reference price in an open bidding process. The reference price is a consensus price of various ministries, set by the government-appointed financial adviser.

A source involved in PSO’s privatization of PSO said the current price estimates are a bit on the high side.

“PSO is one of few public companies which is run efficiently and I don’t think a potential buyer is likely to get much value from strategic control,” said a corporate source.

Balance Sheet Needs A Cleanup: Analysts said that in order to get a maximum price, the government has to clean up PSO’s balance sheet from the loans owed by various state-owned companies. Karachi Electric Supply Corporation and the Water and Power Development Authority owe PSO close to Rs 11-12 billion.

Potential buyers are said to want these debts cleared before PSO goes to the auction block.

A government official told Dow Jones Newswires that the government plans to issue bonds before September to cover these outstanding debts to pave the way for PSO’s privatization.

Details of the bond issue are still being discussed, he said.

The additional cash should help strengthen PSO’s balance sheet ahead of its planned sale to strategic investors.

Analysts said that due to its long corporate ties with PSO and its financial muscle, Kuwait Petroleum stands the best chance of winning among the three potential bidders.

“It makes sense for KPC to be more aggressive in the bidding because PSO is a guaranteed marketing outlet for them and a best opportunity for a vertical integration,” said Asif Qureshi, research head at Elixir Securities.

Kuwait Petroleum is a state-owned company responsible for producing, refining, transporting and marketing oil products.

PSO has been signing yearly term deals with Kuwait Petroleum since early 2001, when the government freed diesel imports from state control.

Kuwait Petroleum provided oil to Pakistan on deferred payments during a 1998 financial crunch brought on by international sanctions after the country conducted nuclear tests. And it currently meets over 70% of Pakistan’s diesel import needs every year.

One of the other potential bidders, the Fauji Foundation, is a local group operated by retired officials. Its assets include banks and fertilizer companies.

“I think it will be difficult for Fauji Foundation to raise money on the strength of its balance sheet after a major acquisition last year,” said Mohammed Sohail, research head at Investcap Securities. “But they can still surprise the market if they could arrange a consortium of investors,” he said.

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