Merger of D. G. Khan Cement and D. G. Khan Electric

Can the shareholders of both the companies benefit tangibly?

Dec 27, 1999 - Jan 02, 2000

The scheme of arrangement for merger of two companies of the Mansha Group, D. G. Khan Cement Company (DGKCC) and D. G. Khan Electric Company (DGKEC) has been announced. It will be of some interest for the shareholders of both the companies to understand the implications of this merger. While DGKCC has posted loss after tax amounting to Rs 580 million, DGKEC has posted Rs 116 million profit after tax for the year ending June 30, 1999.

According to the Scheme announced DGKCC will issue at par and allot the individual members of DGKEC "X" fully paid-up ordinary shares of the par value of Rs 10 each in the capital of DGKCC for every one fully paid-up share of the par value of Rs 10 each held by them in the capital of DGKEC. The value of "X" will be determined on the basis of ratio resulting from the average of under mentioned two figures for both the companies: a) break-up of value of the share as per audited accounts for the year ended June 30, 1999 and b) average of weekly quotation of the shares on the Karachi Stock Exchange from July 1, 1998 to June 30, 1999. All costs, charges and expenses of carrying this scheme into effect will be borne and paid by DGKCC. The Scheme will be subject to such modalities or conditions as the Hounourable Lahore High Court may approve or impose.

In case this scheme is not finally sanctioned by the Court for any reason or for any other reason the Scheme cannot be implemented before June 30, 2000 or within such further period as may be agreed upon by DGKEC and DGKCC this scheme will become null and void and in that event no rights and liabilities will accrue to or be incurred by the parties in terms of this Scheme.

DGKCC has a paid up capital of Rs 1,324 million and DGKEC has a paid up capital of Rs 200 million. But DGKCC's equity has been eroded by partly due to accumulated loss of Rs 638 million as on June 30, 1999. It is worth noting that DGKCC has posted gross loss of Rs 58 million for the year 1999.

It is also worth noting that DGKEC is a captive power plant supplying electricity to DGKCC mainly and making regular profit. But, the profitability of DGKCC has been under pressure due to over-supply of cement in the country. This was despite the fact that production of clinker and cement increased by 8.6 per cent and 22 per cent respectively in 1999 as compared to the previous year. It had also posted loss before tax of Rs 47 million for the year 1998. One of the reason for the loss for 1999 was considerably high financial charges amounting to Rs 578 million. These charges were only about Rs 70 million for the previous year. While DGKEC has declared 25 per cent cash dividend for the year 1999, DGKCC was not in a position to declare any dividend for the last two years due to persistent losses for the last two years.

During last few years cement industry has remained in crisis and conditions further deteriorated in July 1998. At this point the price of cement came to all time low due to widening of the gap between supply and demand and DGKCC was not an exception. The crisis is expected to continue due to: economic slow down, negative growth of cement demand, addition of new capacity, high taxation and higher cost of production.

The management of DGKCC has reportedly considered various options for consolidating its activities and thereby effecting economies. It has reached the conclusion that DGKEC be merged with DGKCC. The merger is expected to lessen the financial burden of DGKCC and reduce the administrative and corporate costs.

However, some of the analysts believe that this merger will be against the interest of shareholders of DGKEC as the unit is proposed to be merged with a loss making unit. The economic fundamentals for the cement industry are not expected to improve in the near future. DGKCC may not be able to pay any cash dividend to its shareholders for a number of years due to huge accumulated losses.

As at June 30, 1999 DGKCC's current liabilities stood at over rupees three billion while current assets were slightly more than rupees one billion and it had posted a loss before tax of Rs 578 million. Continuation of the DGKCC as a going concern is dependent on its ability to attain satisfactory level of profitability in the future and in the intervening period ability, if necessary, to liquidate long-term investment and continued support from lenders and sponsors.

However, a point to be noted is that DGKCC investment mostly in associate companies amounting to Rs 674 million which had a market value of Rs 236 million as at June 30, 1999. Investment having face value of Rs 388 million are pledged as security against lease facility, working capital loan and bank guarantees.

D. G. Khan Cement
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