K-Electric shows interest in acquiring govt’s KAPCO stake

K-Electric has shown interest in acquiring the government’s remaining 40.25% stake in Kot Adu Power Company (Kapco), the country’s largest Independent Power Producer, which the government wants to sell to meet budget financing needs.

K-Electric and two other companies have submitted Expression of Interests (EOIs) in response to an advertisement the government gave for selling its remaining stake in Kapco to a strategic investor, according to officials of the Privatisation Commission.

The last date for submitting the EOIs and Statement of Qualification by the prospective bidder was September 20 but this week the government extended the deadline by one month to allow international investors to participate in the process, they added.

Sadia Dada, director communication at K-Electric, confirmed that the company has submitted the EOI as part of its strategy to expand its business interests. The company already has an integrated network of generation, transmission and distribution.

However, the Ministry of Water and Power’s move to defer a decision on whether to extend the Power Purchase Agreement of Kapco beyond 2021 would affect its pricing by at least Rs10 billion, said sources. The Power Purchase Agreement will expire in June 2021.

The advisors have valued Kapco under the Discounted Cash Flow (DCF) model and market-based valuation. Depending on various conditions, the advisors valued the government’s 40.25% stake in the range of Rs24.4 billion to Rs28.2 billion under the DCF model, if Kapco’s power purchase agreement is not extended beyond June 2021.

In case of a 10-year extension in the power purchase agreement, the stake is valued in the range of Rs33.3 billion to Rs37.3 billion under the DCF model, according to financial advisor’s assessment.

There is also an issue of liquidated damages claimed by WAPDA valuing at Rs27.7 billion. The financial advisor has said that the buyers may require the government of Pakistan to provide adequate comfort in the unlikely event that this contingency is materialised. Under market-based valuation, the 40.25% stake is valued in the range of Rs24.4 billion to Rs28.1 billion.

As many as nine Turkish companies showed interest during a recently concluded road show that the Privatisation Commission organised in Turkey and Dubai to sensitise the international investors. A few Chinese companies have also shown interest, they added.

Kapco is Pakistan’s largest IPP having 1,600 megawatts generation capacity. Its units fall at either number four or seven on the merit order that the government has set according to the efficiency of the power plants. The high position on the merit order makes the power plant attractive for prospective investors.

So far, the government has earned more than $1.7 billion through easy capital market transactions. Such transactions do not meet the objectives of privatisation such as improved service delivery to the people and minimising losses to the public exchequer. The government has already shelved its plan to privatise loss-making power distribution companies due to opposition from the Ministry of Water and Power.

Kapco is among the profitable enterprises and its management is already in the private hands. Wapda, financial institutions and reputable industrial groups jointly own the company. The government is expecting to generate around Rs30 billion from the sale of its remaining stakes, which it will use to finance the budget deficit.

K-Electric’s interest in the Kapco comes at a time when the company’s majority shareholder has expressed the intention to sell its interest in the country’s only privately controlled power distribution firm.

In a filing to the Pakistan Stock Exchange (PSX) on August 30, K-Electric acknowledged that it received a notification from its majority shareholder -the Abraaj Group, that it was evaluating the possibility of divesting (directly or indirectly) its shareholding in K-Electric.

China’s state-owned Shanghai Electric Power announced its intention to bid for the acquisition of a stake in K-Electric, which has a total market value of $2.3 billion.