Belt and Road: Shanghai Electric buys in Pakistan

As one of China's biggest electricity companies buys assets in Pakistan, One Belt One Road appears to be picking up steam.

One Belt, One Road’ has long been little more than a nice slogan, the catch-all for a plethora of potential deals and projects. But three years after the slogan gained prominence, the deals are starting to come.

Shanghai Electric Power, one of the top five state-owned electricity producers in China, announced on Sunday that it would buy 66.4% of Pakistan’s K-Electric for $1.77 billion.

The deal is a classic Belt and Road transaction, mixing economic sense with geopolitical savvy. China has been taking on a more prominent role in Pakistan, with the establishment of the China-Pakistan Economic Corridor last year. It looks set to take over from the International Monetary Fund, which is ending its support programme for Pakistan after three years.

But the deal is not simply about spreading Chinese influence. It makes perhaps even more sense from a purely economic point of view. China’s electricity sector is facing over-capacity problems, said a fund manager. This deal should help “create a new channel” for some of that capacity, he said.

Still, market participants on both the buy-side and sell-side were quick to point to the wider context of the transaction — and the fact that it heralds an early-step in a series of One Belt One Road investments that are only set to get bigger and more frequent in the years to come.

“This deal not only sets the stage for China’s One Belt One Road initiative, but also opens the gate for future China outbound M&A in frontier and emerging markets,” said Houston Huang, head of global investment banking for China at JPMorgan, which helped advise on the deal.

This view was echoed by fund managers spoken to by FinanceAsia, who said it was clear that — after years of talk — One Belt One Road was starting to take on real meaning.

“This deal has in fact changed the market’s perception about One Belt One Road from a conceptual story to a reality,” said an event-driven portfolio manager based in Hong Kong.

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Shanghai Electric Power is buying the entire 66.4% stake from KES Power, a holding company formed by a consortium consisting of Dubai-based private equity firm Abraaj Capital, Saudi Arabia’s Al-Jomaih Group and Kuwait’s NIG Industries. The consortium took over K-Electric in 2009, with Abraaj taking management control.

It is not the first time the consortium has cashed in part of its stake. In 2015, KES Power sold 2.8% of K-Electric through a secondary placement by offering a 3% discount to investors.

But this time, the sellers are getting out at a premium.

Shanghai Electric Power is offering PRs10.05 per share, a 10% premium to where K-Electric’s stock price closed last week. But the opportunity for investors to profit from the bid ended quickly: the stock spiked 10% on Monday’s open.

The punchy offer price means has generated a profit of around 180% — or an annual return of around 14% — from its investment in the Pakistani company, according to an analyst.

“The price that China is paying in this deal is certainly not cheap,” said a China-focused fund manager based in Hong Kong. “But actions speak louder than words. This has demonstrated China’s determination in implementing the One Belt One Road strategy concretely and thoroughly.”

The deal was first being widely talked after Shanghai Electric Power made a public announcement late August, telling investors that it was hiring advisers to conduct due-diligence on K-Electric. 

At the time, analysts estimated the transaction would be worth between $1.2 and $1.7 billion. The $1.77 billion offer, of course, beat those expectations, and gave the company a price-to-earnings ratio of more than 6.7 times and a price-to-book of more than 1.5 times.

K-electric holds a monopoly over power generation in Karachi, Pakistan’s largest and most populous city.

JPMorgan advised Shanghai Electric. Citi and Credit Suisse advised Abraaj Group.

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