Caixin.com: SEP to Acquire Stake in Pakistan's K-Electric

Shanghai Electric Power Company Limited (SEP) and Dubai-based Abraaj Group (Abraaj) signed an agreement in Beijing on the purchase of 66.4 percent stake of the Pakistan-based K-Electric Limited (KE) for USD 1.77 billion (equivalent of RMB 11.99 billion) in cash, and thus SEP would become the controlling shareholder of KE, announced SEP on October 31.

 

JPMorgan Chase & Co. advised SEP on the sale. Houston Huang, JP Morgan Head of Global Investment Banking for China told Caixin reporter that SEP's acquisition of KE marks the biggest M&A by Chinese enterprises in Pakistan's history.

 

KE was established in 1913 and is a listed company in Pakistan. Abraaj is KE's controlling shareholder. As of the end of FY2015, KE had total assets of USD 3.6 billion (equivalent of RMB 24.39 billion) and recorded revenue of USD 1.88 billion (equivalent of RMB 12.74 billion) and net profit of USD 280 million (equivalent of RMB 19 billion) for FY2015.

 

As a financial investor, Abraaj has been holding KE's stake since 2008, and started to seek for potential buyers from 2015 in order to sell the stake at a profit. Besides SEP, other bidders are from the US, Europe and Middle East, etc., including a few Chinese companies. Finally, SEP won the bid as a strategic investor.

 

KE is the key power supplier to Karachi and its adjoining areas and also Pakistan's only vertically-integrated power company engaged in generation, transmission and distribution. With a total installed capacity of 2,243 MW, accounting for 10 percent of that of the country, KE operates five power plants, mainly oil-fired and gas-fired, among which part of the unit facilities need to be upgraded.

 

As one of the major listed companies owned by State Power Investment Corporation (SPIC), SEP has thermal power, gas-fired power and new energy all rolled into one, and could export technology and equipment to KE.

 

What attracts SEP more is the electricity market in Pakistan. In contrast with electricity oversupply in China, there is outstanding contradiction between supply and demand in Pakistan's electricity market, and a large gap between peak demand and existing power generation capacity. According to the statistics, the actual electricity demand within the service area of National Transmission & Despatch Company (NTDC) is between 18-20 GWh, and the gap is 6 GWh against the actual generation capacity between 12-14 GWh.

 

During the summer peak in Pakistan, daily power outage in the urban regions could last 12 hours while that in the suburban regions could last 16 hours.

 

Pakistan has been importing electricity from other countries since 2003, but the imbalance between supply and demand has not yet been tackled effectively due to outdated power infrastructure and relatively high transmission loss. According to statistics from the World Bank, the annual per capita electricity consumption was only 450 KWh in 2013, accounting for only 14.49 percent of the world average level, which was not only much lower than the average level in Asia, but also lower than the average level in Africa, with quite large development space. As Pakistan put forward in "National Power Policy 2013", electricity shortage is expected to be eliminated in 2017, with electricity surplus from 2018 onwards. At present, the country is under construction of several thermal power, wind power, PV power etc. projects.

 

Nevertheless, compared with developed countries in the US and Europe, there are more blanks and uncertainties regarding policy and law in Pakistan as an emerging economy, which is not only the biggest difficulty confronted by SEP during this transaction, but also among major risks for the company to continue market expansion Pakistan in the future.

 

The transaction has gone through the corporate decision-making procedures and will be completed after regulatory approvals are obtained in both countries.

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