Asia-Pacific Strategic Investments (APSI), a leading provider of integrated bereavement care services in the region has taken a strategic leap of faith as it jumps into the energy-hungry industry with both feet. A $568 million contractual sale and purchase agreement with Bright Eagle Enterprises Group Limited (BEEGL), an engineering solutions provider in the power generation industry will bring APSI into a totally different industry.
APSI will pay out $275.3 million for this deal, through cash of $20 million, issuance of 474.7 million new shares at $0.40 each, its entire bereavement business and the issuance of 234.6 million unlisted warrants at $0.02 each. The issue price of $0.40 for the new shares is equivalent to the last traded price of APSI, while each unlisted warrant may be exchanged for a new APSI share at an exercise price of $1.50 until 16 May 2014. The remaining sum of $292.7 million (stages two and three) will be financed by the issuance of 731.8 million new shares, upon approval of APSI shareholders.
Upon completion of the proposed deal, APSI will have 100 percent ownership of two joint development agreements (JDAs) secured by BEEGL, which involves conversion of up to seven fuel oil-based power generators in Pakistan. This conversion of the seven power generators will be carried out in three stages, which is expected to be completed by March 2018. For starters, 2X210 MW and 1X135 MW generation units will be converted under the JDAs, and this phase has been valued at US$312.9 million, according to a valuation report dated 11 April 2012.
Massive Cost Savings Using Coal
Because the traditional way of generating power by fuel, is way too costly, the switch to coal will cut down the costs of generating power substantially. Shaheryar Chishty, executive director of BEEGL gave an example of the price differential between coal based generating costs and fuel based generating costs.
“To produce 1 KWH of electricity using fuel, it’ll cost about US$0.18. Using coal to produce 1 KWH of electricity will only require about US$0.06-US$0.08. This difference, is huge and we get to keep it, translating into higher cash flows, return on assets, and return on equity,” Said Chishty.
Mr Chen Ping, Deputy Secretary General of China International Council for the Promotion of Multinational Corporations highlighted that the time frame to build a traditional fuel based generator is roughly three-four years whilst that of a coal based generator takes only approximately 18 months.
The coal based production of electricity inks a major first in the history of Pakistan as the nation struggles with the overly expensive fuel dependant generators.
“This desperate struggle in Pakistan to switch to a lower cost of producing electricity is a logical win-win approach for both the government, and for us,” added Chishty.
Recurring Earnings Stream For 15 Years
The massive difference between using coal and fuel will translate into recurring earnings stream for the next 15 years once the coal based generators are completed, and up and running. For now, BEEGL will use its coal from coal suppliers
According to Chishty, the contracted project of 1400MW using fuel will cost around US$2 billion per year, where the switch to coal will cost approximately US$700 million per year. This translates to a savings of US$1.3 billion per year, in which BEEGL will be able to keep 30% or around US$390 million, per year for the next 15 years.
However, during the span of 18 months where the coal based generators are being built, there will be no income inflows.
Dato Dr Choo, chief executive officer and chairman of APSI stressed that this switch is to maximise shareholder value.
“This kind of offer does not come every time. It’s a unique opportunity for us to tap into a growing energy potential which will not only provide us with robust savings, but recurring cash flows.” Said Dato Dr Choo.
An EGM will be convened at a date to be further advised.