The Pakistan government sold its entire stake in United Bank Limited in a block share trade that met with strong global investor interest, kick-starting the country's renewed privatisation drive.
The government raised $387.9 million by selling its remaining 241.9 million shares in United Bank at 158 Pakistani rupees per share ($1.60) -- a 7.3% discount to their June 10 close.
The institutional book was twice oversubscribed, according to a banker close to the deal, with international investors making up more than four-fifths of the total. Asian investors accounted for roughly 20% of the book, with the remainder split evenly between the US and Europe, the banker said.
Credit Suisse, Arif Habib and Elixir Securities handled the transaction.
Barring a few small follow-ons, the divestment of the government's 19.8% stake in United Bank is Pakistan's first equity deal since Habib Bank’s $134 million initial public offering in August 2007, data from Dealogic shows. It also comes three months after the Islamic Republic of Pakistan sold a $2 billion dual-tranche note, the country’s largest international sovereign bond offering to date and the biggest debt issue by a high-yield emerging Asian sovereign since 2011.
Strong demand for United Bank shares from both domestic and foreign institutional investors enabled the government to exercise the upside option of 81.9 million shares, in addition to the original 160 million shares on offer. And while some analysts cautioned that the float could subsequently put price pressure on the stock, that threat has yet to materialise.
United Bank shares have risen 1% since the June 13 block trade and are up 33% year-to-date.
The bank, one of Pakistan’s biggest institutions, is currently trading at 9.8 times estimated 2014 earnings and 8.5 times forecast 2015 earnings, while its 2014 and 2015 price-to-book value is 1.9 times and 1.8 times, respectively, according to Bloomberg.
New frontier
Analysts are optimistic about both United Bank and Pakistan, pointing to strong underlying economic fundamentals and a reform programme that is broadly on track.
“This is a landmark transaction that finally re-opens the capital markets in Pakistan after a long hiatus and marks a significant step in the government’s ambitious economic-revival program,” said Hong Kong-based Ali Naqvi, head of equities, Asia Pacific, at Credit Suisse.
Nawaz Sharif, recently sworn in as the country’s prime minister for a third time, controls almost half the seats in parliament. This allows his Pakistan Muslim League-N party to govern without a chunky coalition partner and also gives it more freedom to implement a reformist agenda. Since inheriting a troubled economy, energy crisis and worsening security situation, the government has taken steps to cut subsidies and eliminate debt from the electricity sector. It also negotiated a $6.6 billion deal with the International Monetary Fund to prevent default.
The country’s fiscal deficit stood at a record 8% in 2012. It has since dropped to 6% and the government is targeting 4.8% by 2015.
“This will give more space for the government to [work on] more projects, and allow the private sector to focus on growth,” Naqvi told FinanceAsia.
Although Pakistan’s next equity-linked deal won’t come for some months, Naqvi said the strong foreign investor interest revealed in the United Bank share sale boded well for inflows in the future.
“For the last two years, emerging markets have underperformed because of a lack of growth. Investors either moved into developed markets, such as the US, or moved down to frontier markets in search of growth,” he said.
The term ‘frontier markets’ describes a second tier of emerging market that is smaller, less developed and relatively inaccessible but nonetheless investable with potentially higher rates of growth. Pakistan is commonly defined as a frontier market by analysts.
“That is the trend. Frontier markets can provide 15 to 18% growth, which most emerging markets countries would struggle to do,” Naqvi said. “We think this is a good time [to invest in Pakistan].”
