KARACHI: Engro Corporation Limited has agreed to sell a controlling 51 percent stake in its foods subsidiary to a Dutch dairy cooperative in a deal valuing around $448 million, the country’s second-biggest listed dairy firm said on Monday.
“The company (Engro Corporation) agreed to sell up to 51 percent of the shares of Engro Foods Limited to FrieslandCampina Pakistan Holdings BV of the Netherlands in terms of a sale and purchase agreement,” it said in a notice issued to the Pakistan Stock Exchange.
FrieslandCampina is one of the world’s largest dairy companies with around 19,000 member farmers and annual revenues of more than 11 billion Euros. The Dutch firm, expressed its intention to acquire Engro Foods in last March, has agreed buy about 391 million or 51 percent controlling stakes.
Engro Corporation holds more than 87 percent in its wholly-owned foods subsidiary. Citigroup Global Markets Ltd. in London is the financial adviser to the deal, while the Pakistan unit of the bank is the manager.
"This is a defining moment for Pakistan,” Hussain Dawood, chairman of Engro Corporation said. “This partnership enables us to provide a wider array of affordable high quality dairy products for a healthier Pakistan, especially for its younger population.”
The execution of the transaction, the country’s single largest private sector foreign direct investment, is subject to approval of competition and other relevant authorities.
The notice said the companies agreed the sale price on a cash and debt free basis of Rs96.6 billion to be adjusted for certain items, including debt and debt-like items, cash and cash equivalents and working capital.
“The estimate sale price as of Monday after taking the adjusting items into consideration is approximately Rs120/share ($448 million),” it said. “The final sale price will be calculated within 40 business days of closing after preparation of the closing statements reflecting the adjusting items as of the closing date.”
Equity analysts forecast a decrease in Engro’s earnings after the divestment.
“The future consolidated earnings of Engro are likely to fall by an average 13 percent as a result of the decrease in stake in EFoods,” Amreen Soorani of JS Research said. “However, we believe the deal is likely to be a positive for the conglomerate if the cash generated is reinvested in higher return generating projects.”
Soorani said EFoods is likely to develop infant nutrition milk powders where FrieslandCampina has expertise.
Analyst said the acquisition price of Rs120/share is at 26 percent discount to the last closing. “This discount is not surprising as market gossip was expecting a lower price. At Rs120, the deal is done at 2016E PE of 20x and Price to Sales (PS) of 1.5x,” Topline Securities said in its report.
“The main reason for Dawood Group to sell the stake at discounted price we believe is to gain FrieslandCampina’s dairy expertise and introduce new products,” it added. “This is because, EFOODS dairy segment consists of only three products (two packaged milk ‘Olpers’ and ‘Omung’ and one liquid tea whitener, ‘Tarang’) that contribute around 90 percent (around 10 percent contribution comes from ice cream segment) to the company’s net sales.”
Chief Executive Officer (CEO) Babur Sultan at Engro Foods said Pakistan’s growing consumer market is well-poised for new innovations and consumer offerings across the dairy sector, “and this partnership is set to capitalise on this opportunity.”
“Moreover, the similarities in our core values and company culture will help us in achieving our strategic direction, at an accelerated pace,” Sultan said.
CEO Roelof Joosten at Royal FrieslandCampina NV said the acquisition will help the group in gaining a market share in the country.
“Through this well organised and highly successful company we will obtain a significant presence in the Pakistani dairy market in which a growing middle class is buying more processed milk,” Joosten said. “Engro Foods offers us a basis on which we can build further. This acquisition will contribute to the value creation for our member farmers.”