Spence pullout is good? Share closes up after temporary fall

The Daily FT’s exclusive expose of Aitken Spence Plc’s pullout from Sri Lanka’s biggest ever FDI project – the upcoming US$ 500 million Colombo South Container Terminal sent shock waves in corporate, shipping, political and diplomatic circles yesterday whilst investors found their own opportunity as well.

A relatively high volume of 110,900 shares of Spence traded yesterday for Rs. 113 million with price initially hitting a low of Rs. 113 at the opening of trading but closing at intra-day high of Rs. 115, up by 80 cents.

Arrenga Capital said some accumulation was evident in Spence as it saw a large transaction of 103,800 shares being done at Rs. 115 each. This was whilst a mandatory offer by Spence’s controlling shareholder Distilleries (which owns 30%) is on at Rs. 110 per share. The market also saw investor interest on Distilleries price of which gained by 1.2% to Rs. 142.

The impending pullout by Spence is being viewed as a major setback to private sector as well as to the Government’s efforts in championing public-private partnerships on infrastructure development. However from shareholder-perspective Spence is trying to save its skin via the move as persisting with the port project could destroy reserves.The latter is owing to near $ 100 million overrun in costs of the project as opposed to its original bid of $ 500 million as well as project lender China Development Bank requiring extra cost to be met via equity financing.  Spence holds a 30% stake in the venture along with China Merchant Habrour International holds 55% and Sri Lanka Ports Authority 15%. Equity component of the project is 30%.

Spence's total equity as at September 2011 amounted to Rs. 27 billion of which reserves were Rs. 11 billion and retained earnings were Rs. 9 billion.

Unsure whether market saw greater prospects for John Keells Holdings following Spence move as the premier blue chip saw its share price gain by Rs. 1.20 (0.7%) to Rs. 166.20. JKH’s subsidiary South Asia Gateway Terminal Ltd manages and part owns the Queen Elizabeth Quay in Colombo port and in the event of Spence pullout SAGT will remain the sole private-sector managed facility. After some setback, SAGT has bounced back to boost its contribution to JKH bottom line since last financial year.

When Spence clinched the deal, rating and company analysts whilst welcoming expressed some concerns on the blue chip’s financial soundness. They opined that at original cost $ 500 million the project would take minimum of seven years to spring profits whilst latest calculation based on $ 600 million enhanced cost is now estimated at 15 years,. This along with lender’s clauses could be a prime factor for Spence Board to jump the ship.