Ceylon Oxygen buyer not here for long haul-analysts

Actis South Asia Fund 2, the owning company of Europium Limited which incorporated Specialist Gases Ltd (SGL), in Sri Lanka to acquire 70.85 percent of Ceylon Oxygen Ltd (COL) will add value to the gas firm, but is not here for the long haul, according to market analysts.

“Judging by the fund managing firms engaged in such acquisitions, this is a natural progression,” one analyst told The Sunday Times FT.

He said that according to the valuation report by C.T. Capital Limited, Actis South Asia Fund 2 LP is a Limited Partnership, established in the United Kingdom by a Limited Partnership Agreement and the main parties involved in the partnership are Actis Executive LP participating and Actis South Asia GP Limited. “The primary purpose of the partnership is to make investments in the developing South Asian markets, notably India, Pakistan, Bangladesh and Sri Lanka which will typically be medium term to long term in nature, with the principal objective of generating capital growth. As such they will direct the company to add value for about five years and then sell out,” he added.

The valuation report has said that despite the demand increasing in recent times, competitive pressures have also begun to take their toll on price flexibility. Open market competition has given more bargaining power to the consumer and the services and flexibility offered to the consumers are becoming the distinguishing criterion.

It said that SGL has indicated that they are looking to de-list the company if they secure more than 75 percent control.

“The company is clearly looking for more control,” a stock market analyst said. COL has increased its earnings per share (EPS) by compound annual growth rate of 31 percent over the past three years and it has maintained a dividend of Rs.30 per share with a dividend payout in excess of 100 percent. The company has also seen a revenue growth of 21 percent last year since the three percent in 2002.

According to the valuation report by C.T. Capital Limited, the highest traded price of the stock during the period from January 1, 2003 to June 29, 2006, the date of announcement of the acquisition to the stock exchange, was Rs.202. “The average price during this period was Rs.133.17. The offer price is therefore at a substantial premium to historic price levels,” the report further said.

It said that historically the company’s stock has been attractive to investors due to its high dividend payouts and attractive yields on secondary market prices.

The company’s products include industrial and medical gases, liquids including oxygen, nitrogen, nitrous oxide, carbon dioxide, dry ice and dissolved acetylene, while trading in electrodes, transformers, medical equipment and imported gases.

The industrial gases segment is expected to have approximately a market size of 2.5 million cubic metres per annum. The industry operated as a monopoly prior to privatization of Ceylon Oxygen Limited. Currently there are 3 main players operating in the industry manufacturing industrial gases namely Air Liquide, Melco Oxygen and Ceylon Oxygen Limited.

The report highlighting the factors that influence the variable cost of the industry, said that raw material cost, energy cost and wastage are primary, with global prices for the raw material used in industrial gasses sector has increased with the boom in global commodity prices.

“This coupled with the increase in energy cost due to higher oil prices has increased the industry variable cost. Investment in advanced storage facility allows minimising wastage to control the variable costs,” it said, adding that the labour cost is the single most significant fixed cost component other than the investment in the manufacturing plant.

Although demand has been increasing in recent times, competitive pressures have also begun to take their toll on price flexibility. Open market competition has given more bargaining power to the consumer and the services and flexibility offered to the consumers are becoming the distinguishing criterion.

The report said that the growth in metal production, healthcare, soft drink production and other industries which engage in metal welding and cutting processes has a direct impact on the demand for the industrial gases. In the past few years the industry is expected to have grown on average 23 percent per annum. The report said that the industrial gases segment is expected to have approximately a market size of 2.5 million cubic meters per annum.