China Securities Journal: SEP to Pay $1.77 Billion for Controlling Stake in Pakistan's Electricity Company

SEP will acquire 18.34 billion shares or 66.4 percent stake of Pakistan's K-Electric (KE) from KES Power for USD 1.77 billion in cash, and will provide up to USD 27 million worth of incentives to its counterparty or the parties designated by the latter in view of KE's operation conditions in future, announced the company on October 30.

 

According to the valuation report provided by Deloitte, the valuation range for the 66.4 percent stake of KE is between USD 1.74 billion and 1.85 billion. Through several rounds of negotiations between both sides, the transaction price was finalized at USD 1.77 billion.

 

SEP noted that it would pay for the KE stake to its counterparty, KES Power with its own funds and bank loans. As of June 30, 2016, the outstanding amount of cash and cash equivalents from SEP's consolidated financial statement was RMB 4.47 billion. Regarding the financing for the KE deal, SEP has reached financing intentions with a number of Chinese and foreign banks.

 

If the transaction is completed smoothly, KE will become a holding subsidiary of SEP, and will be included in the consolidated financial statement of the latter. As of March 31, 2016, the total assets and net asset of KE was equivalent of RMB 22.08 billion and 9.32 billion, accounting for 40.59 percent and 56.98 percent of that of SEP during the same period respectively; the revenue and net profit of KE for FY2015 was equivalent of RMB 11.65 billion and 1.73 billion, accounting for 68.48 percent and 77.71 percent of that of SEP for 2015 respectively. The purchase of KE stake will greatly enhance the asset scale and profitability of SEP.

 

SEP expected its revenue to increase greatly and its profitability to further improve after the transaction is completed, despite the negative impact arising from the interest expenditure of newly increased bank loans for the transaction payment. In the coming years, with gradual improvement of KE's operation and management efficiency, SEP would further strengthen and expand its main business and accomplish it development strategy. Therefore, the KE deal will have a positive influence on the company's future earnings and profitability.

 

The transaction will also help SEP establish its market presence in South Asia in advance, which will facilitate its accumulation of marketing and management experience in the electricity industry overseas, especially in countries and regions along the Belt and Road, in-depth integration with local market environment, management environment and legal environment, and sustained promotion of the company's strategic layout in line with the Belt and Road Initiative. Through connotative development integrated with "going global", the company has laid a solid foundation for realizing its strategy in the 13th Five-Year Plan period.

 

In addition, countries like Pakistan are still suffering from electricity shortage, with need to import electricity, which indicates a huge potential for upgrading the power infrastructure in those countries along the Belt and Road. In the future, upgraded and optimized power transmission lines will lead to reduction of transmission and related loss and thus lower costs and further improve management benefits. Consequently, the electricity demand increase as well as electricity equipment and technology upgrading in countries along the Belt and Road will create broad market space. Thanks to the KE deal, SEP has been prepared for the relevant power infrastructure projects along the Belt and Road, in the hopes of building up the market share and presence in the related countries.

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