Clariant Pakistan: Selling few businesses

On Wednesday, Clariant Pakistan (CPL) has announced its intention to divest its few segments, which caused 10% surge in the stock price in last two trading days. According to the notice to KSE, CPL will spin-off all business segments except textile chemicals, paper specialties and emulsions to an unlisted firm Clariant Chemicals (Pvt.) Ltd.

The announcement was anticipated as SK Capital Partners announced in December last year that it has signed asset and share purchase agreements to acquire the textile chemicals, paper specialties, and emulsions businesses of Clariant International. To seal the deal, Clariant International is divesting all other businesses so that SK Capital could acquire Clariant International.

About CPL, Clariant International & SK Capital

With the paid up capital of Rs341mn and market cap of Rs10.7bn, Clariant Pakistan (CPL) is involved in textile chemicals, paper specialties, emulsions, masterbatches, leather services, pigments, additives, industrial & consumer specialties, oil & mining, detergents & intermediates and catalyst businesses. At present, Clariant International owns 75% of company's outstanding shares.

During last 5 years, company reported sales and profitability CAGR of 11.4% and 20.4%, respectively. In 2012, company earned Rs1.18bn (EPS Rs34.5) compared to Rs0.78bn (EPS Rs22.8) in 2011.

Clariant International is involved in specialty chemical products and provides dyes and chemicals for the textile, leather and paper industries, pigments, printing inks, decorative paints, plastics, cosmetics, additives and packaging.

SK Capital is a private investment firm focusing specialty materials, chemicals and healthcare sectors and seeks buyouts, recapitalizations and growth equity investments.

Selling business segments and land

Globally, Clariant International is in the process of divesting its textile chemicals, paper specialties, and emulsions businesses to SK Capital. For the smooth sailing of the transaction, CPL intends to sell its master batches, leather pigments, additives and other businesses along with the land property in Lahore and Karachi to Clariant Chemicals (Pvt.) Ltd.  In 2012, these assets contributed about 23% to the profits.

As part of the proposed deal, CPL shall lease back the land from Clariant Chemicals (Pvt.) Ltd. which is required for textile chemicals, paper specialties and emulsions businesses. The transaction is somewhat similar to the last year ICI demerger. To get approval from the shareholders, CPL has scheduled an EOGM on July 11, 2013.

 

One time huge gain

As per company estimates, deal may settle at Rs3.3bn, plus premium. Rs3.3bn is the approximate fair value of manufacturing facilities (Rs2.5bn), Karachi plot (Rs0.5bn) and Lahore plot (Rs0.3bn).

Post-demerger, CPL will be managing textile chemicals, paper specialties and emulsion businesses. Our rough working suggests that in 2012 company derived 77% of the profits, Rs910mn, through these segments.

CPL is likely to record onetime pre-tax gain of Rs1.8bn (Rs53 per share). Further, with Rs3.3bn cash inflow, we expect company to repay Rs1.6bn debt while Rs1.7bn could be re-invested. We estimate finance cost savings of Rs160mn (EPS impact Rs2.8) and other income of Rs150mn (Rs4.4 per share).

However, company may have to pay approx. Rs52mn (EPS impact Rs1.5) as rental charge against leased back land while one time dividend payout can not ruled out.

Research Report

By:Topline Securities