LAHORE: The recent acquisition of the three bankrupt publicly-listed textile companies by private investors with the confirmed intention of merging their unlisted businesses into them underlines the consolidation of the trend of ‘reverse mergers’ in the country’s stock market.

The recent bourse filings by the companies show that majority stake in Ravi Textiles has been acquired jointly by the owners of Chaudhry Steel Re-Rolling Mill and BECO Steel Re-Rolling Mill for Rs30 million at a share price of Rs1.905 along with its management control.

The acquisition will allow the new owners to merge their steel business and rename it as Beco Steel, swapping over Rs3 billion worth of their assets into Ravi Textiles through the merger. They will also issue 101m shares at Rs30 per share to raise new capital.

Likewise, Danish Elahi of the Elahi Group of Companies has acquired 51pc stake and management control of Mian Textile Industries to convert it into a warehousing and logistics business. The new management plans to raise Rs1.2bn in equity and Rs2.5bn in debt financing.

The third one is Samin Textiles acquired by Waves Singer Pakistan to establish a network of retail and e-commerce platforms for initially selling home appliances. Starting with their own brand, the new owners plan to diversify into sale of other domestic and global home appliances brands, as well other products. They intend to inject Rs250m in the company in the shape of a sponsors’ loan.

A reverse merger is a merger in which a private company becomes a public listed company by acquiring it. “The process saves a private company from the complex, time-consuming process, and expensive regulatory compliance of becoming a public company through acquisition of a public company as an investment,” Jawad Rauf, investment banker with Intermarket Securities, explains.

Under the current SECP/PSX regulations, a private company must be operational for three years and show profits for at least two years to become eligible to do an IPO (initial public offering). “So it is always a better option for the private firms to acquire a listed company and merge itself into it to become a public company, circumventing the lengthy, complicated and expensive regulatory compliance. It is especially a good shortcut for new businesses to get themselves listed without having to wait for 3-4 years,” Rauf adds.

By listing on the stock exchange through reverse mergers, according to him, the investors are able to leverage their cash injections into the acquired company to “more easily borrow from the banks and motivate other shareholders to reinvest in it (through right share issue) to turn it around”.

At present, according to Aftab Ahmed, a corporate consultant/adviser who headed the Lahore Stock Exchange before the country’s three bourses were merged into one to create a unified Pakistan Stock Exchange or PSX a few years ago, says reverse mergers are popular the world over because of their multiple advantages.

“In Pakistan, you may find several examples from the past where a private company acquired a shell company to become a publicly listed company using the shortcut. However, this trend is now catching up with 122 companies placed on the PSX defaulters’ counter, offering private companies an easy option to go public on a fast-track basis by avoiding the rigorous IPO process and regulatory compliance for a direct listing,” Aftab, who himself is working on a couple of such mergers, argues.

“This will also help reduce the dead weight the bourse is carrying in the form of defaulter companies.”

To Ali Wahab, an investment banker based out of the UAE, the three acquisitions by businesses which aren’t publicly listed represent interesting times for Pakistan’s market. “All the three (acquirers) have different strategies for raising capital. In essence, Ravi Textiles will merge business without raising funds, Mian Textiles will go for a mix of rights and debt, and Samin Textiles will go for a sponsors’ loan. If these businesses become successful, it will hopefully herald a new era for the private businesses becoming public in Pakistan,” he hopes.

Published in Dawn, April 24th, 2021