The sale of a large part of the controlling stake in Karachi Electric (KE) held by KES Power outside Pakistan appears to be at advanced stages, awaiting approval from the Cayman court but the government of Pakistan is not aware of the deal as the matter is being dealt in complete secrecy.
The sale of these interests which control KE is being spearheaded by Shehryar Chishti who became involved in the KE deal a few months ago through a recently incorporated entity called Sage Ventures Limited formed in an offshore tax haven, according to papers seen by this reporter.
Shehryar Chishti is Chairman of Daewoo FastEx buses and Liberty Power. He is known as a distressed asset purchaser – a situation which arises in KE following the collapse of Abraaj Group in 2018.
Although Abraaj Group had contracted to sell KES Power’s controlling stake in KE in 2016 to Shanghai Electric (Shanghai), that sale has run into bureaucratic difficulty even though every successive government since then of Nawaz Sharif, Shahid Abbasi and Imran Khan had all publicly supported the deal to take place.
Meanwhile, Shanghai keeps renewing its mandatory tender offer every six months on the Pakistan Stock Exchange even though insiders maintain that any deal if it happens will be quite different in terms of price from the original deal agreed by Shanghai. Enquiries made to some KES Power shareholders indicated that they were unaware of the details of this deal but refused to comment further, which meant that the deal was being done directly by Sage Ventures with the Abraaj liquidators.
Senior figures at the Securities and Exchange Commission of Pakistan (SECP) and the Ministry of Power told this reporter upon query that the authorities were not aware yet about any Cayman proceedings. A KE spokesman refused to comment on any details, merely saying that if they were aware, then KE would have to report such a fact to the Pakistan Stock Exchange. What other ministry could be dealing with this matter?
Credible sources familiar with the Cayman court proceedings have directly shared with this reporter that one of the liquidators of Abraaj, namely Deloitte based in Cayman and the appointed administrators of an Abraaj-managed Infrastructure and Growth Capital Fund (IGCF), namely Alvarez and Marsal (A&M) based in London have agreed a deal which was presented to Cayman Court for approval under seal. The sources further said that the secrecy around the court documents appears to have even left the other liquidators, PwC in Cayman and the receivers of a secured creditor, Mashreq Bank in UAE who held a charge over the Abraaj direct ownership in KES Power unaware.
KE supplies power to 22 million consumers of Karachi and is the largest player in Pakistan’s energy sector apart from the government itself. It was privatized by sale to KES Power in 2005 which was a joint consortium of Al Jomaih Group (one of the largest family-owned business houses of Saudi Arabia) and National Industries Group (NIG) (the largest publicly owned company in Kuwait). In 2009, Abraaj Group acquired an equal share and management control in KES Power with permission from the government. The Abraaj investment stake was 70% owned by IGCF which was owned by numerous international investors and 30% by Abraaj itself.
The privatization of KE was widely considered to have been successful. Between 2005 and 2016 when KES Power agreed to sell it to Shanghai for $ 1.8 billion, KE had been turned around posted its first annual profits in 17 years in 2012 with profits exceeding $ 400 million in 2016.
Pakistan government issued a statement welcoming the sale to Shanghai at that time which remained subject to regulatory and government approvals including a National Security Clearance certificate and issuance of a new NEPRA tariff. Six years later, the sale process is nowhere near completion.
At the same time, developments at Abraaj itself deeply affected the transaction. The parent and management companies of Abraaj entered voluntary liquidation in Cayman Court in 2018 which inexplicably appointed separate liquidators to different parts of the same business group. This did not and should not have affected the solvency of its subsidiaries and the funds like IGCF which they managed for outside investors, and which remained successful and operational.
KES Power was not a subsidiary of Abraaj even though until 2018 it was managed by Abraaj. Since then, it has been managed independently and a new Chairman of KE was appointed. He was Shan Ashary, who represented Al Jomaih and NIG. The first sign of Shehryar Chishti involvement came two months ago when Shan Ashary’s term as Chairman of KE was not renewed and Mark Skelton of A&M was given that role. A non-Pakistani Chairman of a strategic listed national asset should have raised eyebrows at the SECP, but it did not. Legal sources also indicate that any change of ultimate control would have to involve issuing a mandatory tender offer since KE is listed, but enquiries have revealed that the stock exchange and SECP are both unaware.
Whilst all this was happening inside Pakistan, Sage Ventures and Chishti began to work behind the scenes to make an offer for controlling influence in KES Power in the Cayman Islands by approaching the liquidators of Abraaj. A decision was expected from the Cayman Court on the Deloitte/A&M application about the Sage Ventures offer last week, but the decision was apparently delayed when certain objections were raised. Enquiries at the Cayman Court did not prove fruitful since the court proceedings were sealed which adds mystery and suspicion to the moves being made to transfer control of a strategic national security asset of Pakistan without the knowledge of most of its stakeholders.
Sources shared that the only apparent explanation for the terms of the deal remaining under seal in Cayman is so that the offer doesn’t get challenged by other investors in KES Power, IGCF, secured creditors of Abraaj or the Pakistan government.
Documents seen by this reporter and issued by Chishti and Sage Ventures to the IGCF investors have revealed that the KE stake held by KES Power is being attempted to be acquired circuitously at a fraction of the Shanghai deal price. It goes on to say, citing “recent public financial and political issues transpiring in the Islamic Republic of Pakistan, including but not limited to the recent change in government and the recent, and continuing, material decline in the value of the Pakistani Rupee” as a rationale for urging international investors to accept this deep discount, taking advantage of their frustration and adds, “In order to help achieve the transaction rationale, the Acquiror has entered into an agreement with ABRAAJ Investment Management Limited (In Official Liquidation) (“AIML”) to acquire AIML’s assets and interests relating to IGCF, including its majority, controlling stake in IGCF General Partner Limited (the “GP Interests”)”.
The documents also clarify that “The Acquiror has entered into an agreement with Alvarez and Marsal Europe LLP (“A&M”) whereby effective as of the closing date of the acquisition of the LP Interests and the GP Interests, A&M shall continue to provide on-going assistance and support to the Acquiror and IGCF GP on a interim basis”. It appears that it is the contents of these agreements which presumably is the basis of the sealed applications to the Cayman Courts for approval.
These offer documents appear to present a hapless risk to those selected investors who received it as well; it says, “We have made this Proposal on the condition that none of its existence, its contents or our discussions relating thereto will be disclosed publicly or to any third party by you, and this Proposal will be deemed withdrawn upon any unauthorized disclosure”.
It appears that a deal was done under seal and secrecy with Deloitte and A&M. Many questions remain about Shehryar Chishti and Sage’s offer, since a number of IGCF investors approached indicated that they had no idea that an offer was on the table. This is a deal cooked in secret. There is no transparency or clarity on who is funding the acquisition and what is the sources of these funds. Information accumulated by us tell us that Chishti and Sage Ventures are still looking to raise funds to complete their transaction, which if true, means that their recently incorporated business does not have the financial means at present to complete the transaction, even if the Cayman Courts were to decide to proceed. What remains perplexing is how the Cayman Courts can pass a view on an offer either way, when the most basic condition of all, namely Pakistan government assent has not been addressed.
Maybe these matters are an issue of concern to the Cayman Courts, and we are unable to prove this any further because the documents are under seal for ‘commercially sensitive’ considerations. Although some noise around a potential change of control has occurred in Pakistan media, the government seems to be officially unaware, which is surprising; how can control of a strategic asset of Pakistan, for which SEP is still struggling to get clearance be transferred to a group or individual without governmental clearance?