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Shareholder backlash: paramilitary forces patrol during a protest at the Karachi Stock Exchange on July 17. Hundreds of angry investors, upset by plunging share prices, demanded a temporary closure of the market |
On the slab over the next year are expected to be significant state holdings in National Bank of Pakistan, Habib Bank and United Bank. Pakistan Steel Mills, the country’s largest steel mill operator, in which the state owns a 10% stake, is also expected to raise a significant chunk of change for the country’s embattled government. Also up for sale between now and end-June 2009 are companies including Hazara Phosphate Fertilizers (state owns 90%), Jamshoro Power (51%) and Faisalabad Electric Supply (56%).
Many of the investors are expected to be global private equity firms such as Texas Pacific Group and Carlyle, and cash-rich Gulf-based corporates and sovereign wealth funds. "Private equity is active and growing, primarily driven by Middle East based sponsors," says Soofian Zuberi, head of Asian equity capital markets at Merrill Lynch in Hong Kong. "The government has announced a privatization programme over the next 12 months – featuring banks, a steel mill and other assets – and, given the government’s aim to reduce the budget deficit, those deals need to be done. Moreover, foreign strategic investment continues to flow in, most recently with the Maybank purchase of a stake in leading Pakistan bank MCB that was the largest ever cross border private sector acquisition done in Pakistan." That list, analysts in Karachi say, would include HSBC and Barclays, along with Chinese lenders such as Industrial and Commercial Bank of China, and China Construction Bank.
Bankers estimate that as much as $6 billion could be raised via successful privatizations or part-privatizations over the next 12 months, although the government does need to tread carefully. The last time it attempted to sell its holding in Pakistan Steel Mills, in 2006-07, to Arif Habib, a former client of the then-premier Shaukat Aziz, it provoked anger among union leaders and opposition leaders, and led in some way to the continuing backlash against president Pervez Musharraf.
Elsewhere the picture is less rosy. It has been a poor year for Pakistan debt and equity issuance, although one of the few completed M&A announcements – the acquisition of a 15% stake in MCB Bank by Maybank of Malaysia – caught the attention of the global media and investors. Bankers expect the markets to remain depressed – just as they are across South Asia, for at least the rest of the year. "Following the Lucky Cement deal earlier this year, on the back of global market weakness and specific local market issues, market sentiment has weakened. In this environment equity issuance will naturally slow," says Merrill Lynch’s Zuberi. The main drags on local sentiment are food and oil prices – issues that are hurting every major emerging economy – power shortages, and law and order. Of those, electricity shortages are perhaps the most easily addressed, with billions of dollars of investment earmarked for the power sector, from local and foreign firms, over the next decade.
A more immediate challenge for the government is to placate angry investors who have lost their shirts this year on falling domestic stock prices. Events came to a head on July 17 when angry Pakistani investors stormed through the Karachi Stock Exchange, breaking windows and swearing at regulators after the market notched its 15th straight day of losses. The KSE 30 index lost nearly 40% in the three months to July 18, falling more than 7,500 points from its peak of nearly 19,000 in late April and wiping $30 billion off the value of domestic stocks. Islamabad’s reaction has been to set up a Rs20 billion ($282 million) state-backed stabilization fund run by the National Investment Trust with the aim of stemming market losses. In the week after the announcement of the fund, the KSE 30 bounced back strongly, gaining just shy of 10%.