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3rd August 1997

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Vanik to star in biggest takeover

By Asantha Sirimanne

If the proposed Rs 2.2 bn acquisition of Forbes Ceylon by Vanik Incorporation goes ahead, Vanik will use the company as its long-term investment vehicle, Vanik Chief Justin Meegoda told The Sunday Times Business.

Forbes Ceylon's wholly owned subsidiary Forbes Capital has blanket approval to invest overseas making it an attractive prize for companies hoping to invest abroad.

The acquisition will be the largest ever in the history of the Colombo Stock Exchange

Vanik is confident of acquiring 100 per cent of Forbes Ceylon to make it a fully owned subsidiary.

On Wednesday Asia Capital Ltd. also reached an agreement with Vanik to dispose of Asia's 11 per cent stake in Vanik.

Vanik will make a general offer to all shareholders under the Takeover and Mergers Code.

Asia said 'it had reached an agreement with Vanik Incorporation which constituted a full settlement of all outstanding issues between the two parties relating to the proposed change of control of Forbes Ceylon.'

An official of Asia Capital said pending court cases are also expected to be settled.

For each Forbes Ceylon share Vanik will make a cash and stock offer valued at between Rs 9.10 and Rs 9.50 at the present prices of Vanik shares.

The deal values the transaction at around Rs 2.2 bn slightly under the Forbes issued capital of Rs 2.4 bn.

Vanik itself has net assets of around Rs 1.1 bn.

Under the proposed transaction Vanik will pay Rs 350 in cash, four fully paid Rs 10 Vanik ordinary shares with voting rights, five fully paid Rs 10 class X shares with no voting rights and four Rs 100, 15 per cent redeemable debentures.

The debentures would be redeemed in five annual installments after six years. After five years Vanik will also be able to buy back all the debentures at a premium of 5 per cent exercising a call option.

In addition the each debenture will also come with a warrant allowing holders to subscribe to a Vanik ordinary share for Rs 25 between 36 and 39 months after their issue.

On Thursday Asia shares shot up to Rs ........... and while Vanik and Forbes trade at Rs......... and Rs..........

The offer consideration however may be varied after verification of the current net asset value of Forbes Ceylon, Vanik said.

This is believed to involve the US $ 5 mn invested in an Indian company, the recovery of which has been is doubt.


Magpek gasps for breath

By Shamindra Kulamannage

Magpeck officials will meet the Labour Minister this week in a last-ditch attempt to keep the company going. The company's main bankers, Commercial Bank and the labour union are also expected to attend.

At a previous meeting which was chaired by the new Labour Minister John Seneviratne, a request had been made to the management of Magpeck and the bankers to come up with new proposals to re-finance the company, Magpeck Chief Executive A.T. Mylvaganam said.

Magpeck says to reopen the factory, a large proportion of the present 1200 workforce will have to be retrenched.

But the labour unions were against the move.

"We have sent letters to the Colombo Stock Exchange clarifying the company's current position," Mr. Mylvaganam said.

The company has not carried out any manufacturing or trading since the closure of its factory at Piliyandala on June 16. Magpeck told the Stock Exchange that all outstanding export orders have been cancelled by the buyers and no new orders have been accepted.

There has been no offer of working capital from any of the bankers to re-start operations at a reduced level, although a suggestion was put forward at the meeting with the Minister to this effect.

"The Commercial Bank has not committed itself to any funding," Mr. Mylvaganam said.

The main bankers however had agreed to first work-out the amount of additional capital needed to re-start operations on a smaller scale on August 5.

Meanwhile Magpeck shares have been changing hands by the thousands at the Colombo Stock Exchange at prices ranging from Rs. 1.50 to Rs. 2. "These trades prompted the company to clarify its position to the CSE in the two letters," said Mr. Mylvaganam.

We said the trades were speculative. "We are quite certain that no party is trying to buy up the company; it might be that the shares owned by other institutions are being sold. None of the major individual shareholders has sold any of their shares."

Mr. Mylvaganam said that around October 1994 the company was performing well having even won export awards. "The problem started when our three major buyers who account for around 83 per cent of our turnover wanted to shift their product range".

Magpeck till then had manufactured around 12-13 million pieces a year of very basic products which could easily be copied as China and Poland who had come to the market making the same products at almost half the cost did. This had forced the company to import new machinery and start making more complicated items. This resulted in many problems with the employees as they were not used to handling this complicated workload, Mr. Mylvaganam said.

The employment of 1,200 persons also proved to be a strain as the company had to spend around Rs. 9 million on the payroll monthly.

The new wooden products had failed to meet the rigorous safety standards in the export market resulting in the products being returned, causing huge losses.

The Commercial Bank had initially financed the company for around 6 months. However the burden proved to be too much on them, Mr. Mylvaganam said.


Diamonds gold to be free of shackels

Ruvini Jayasinghe

A total liberalisation of diamonds and gold imports for re-export is expected soon, following hard lobbying by the industry, President Sri Lanka Gem Traders Association and Facets chairman, Nowfel Jabir said.

Last month import duties on rough and cut and polished gems for re-export were waived, facilitating totally free trade in the international precious and semi precious stone market .

But the industry's wings are still clipped, Mr. Jabir said. The gem and jewellery trade is now pushing for restrictions on imports of gold and diamonds for re-export to be totally lifted.

Importing diamonds for re-export involves a duty of 45 per cent. Gold is officially source from commercial banks and requires a bank/personal guarantee. The minimum quantity requirement of 10 kilos shuts out the smaller jewellers, and promotes smuggling.

"We want absolute liberalisation in the industry like Hong Kong which has no manufacturing base but is one of the top traders in gems and jewellery," Jabir said at a news conference to launch the 7th consecutive Facets Gem and Jewellery exhibition.

Scheduled from August 25 28 the exhibition precedes two leading international jewellery fairs, the Hong Kong fair from September 3 - 6 and the Bangkok fair from September 11 - 14. Most top dealers and jewellers participating in these two fairs are expected to include Facets Colombo in their itinerary.

With participation from Hong Kong, Japan, Germany, Pakistan and Vietnam, nearly 95 per cent of the booth capacity is booked already, officials said.

Among the major buyers are some of the foreign chief guests including Director, General Manager, National Marketing, K. Mikimoto and Co. Ltd. Japan, Mr. Hitachi Mori, President American Gem Trade Association, USA, Mrs. Nanette Foster and President Italian Gem and Jewellery Association, Dr. Gaetano Cavalieri. These special invitees represent some of the top international traders and are expected to promote Colombo.

VIP guests who participated in previous Facets exhibitions like Bulgari and Mouaward have been known to make purchases worth over US $ half a million to US $ one million."However it is not sales but promotion as a gem and jewellery centre that we hope to achieve through Facets," Jabir said.

Sri Lanka which has 55 of the known 140 varieties of precious semi-precious stones, possibly top the list on variety.

Foreign exchange earnings which recorded Rs.12.9 billion now ranks 5th or 6th on the export list.The figures could be improved andGem and Jewellery could over take other leading exports provided absolute liberalisation is granted , Facets officials said.

Sri Lanka's internationally famed blue sapphire and Cat's eye star sapphire, are in high demand but we do not make maximum use of our sapphires, officials said.

Thailand still capitalises on heat treating our blue sapphires.Although heat treatment of calibrated blue sapphires is improving, the same could not be said for free sizes.

This is mainly because heat treating is done by small to medium scale operators who find it dificult to market the stones locally and have no access to export markets.

Air Lanka, Union Assurance ,Securo Dynamics Pvt. Ltd. are officials appointees for Facets 97 to be held at regular venue Colombo Hilton. The official sponspors are EEDB and the National Gem and Jewellery Exchange.


LOLC seeks more funds

The Lanka Orix Leasing Company is seeking new foreign financing to fund forex denominated leases to local companies, following the success of initial efforts to finance BOI companies.

The company is currently awaiting approval from the Central Bank to grant leases to non - BOI firms.

LOLC had earlier obtained US $ 10 mn from the International Finance Corporation (IFC) leases.

But most of these funds had now been exhausted, prompting the company to seek new funds, an LOLC official said.

The company sought the initial loan after the Central Bank approved a facility last year allowing forex leases for BOI companies.

The main beneficiaries of this scheme have been companies based in export promotional zones, especially in the outstations, LOLC said.

Under existing laws only BOI approved companies are liable to receive foreign currency dominated leases.

However LOLC is hoping to grant leases to non -BOI exporters as well, and has requested approval from the Central Bank to do so.

"We hope the Central Bank would make the ruling soon," an LOLC official said.

Should the Central Bank approve this scheme many non - BOI ventures, companies who export around 20 per cent of their production would be able to make use of the facility.


Brokers shy to trade

By Asantha Sirimanne

At least two brokering companies have been approved to trade in shares on their own account after the Stock Exchange introduced new rules permitting brokers to trade.

Colombo Stock Exchange Surveillance Manager Surekha Sellahewa said CT Smith Stock Brokers and John Keells Stock Brokers have both been approved to begin trading on their own account and the decision had already been conveyed to them.

According to the procedures set down by the Stock Exchange companies with a net capital exceeding Rs 10 mn could purchase shares with a value equaling 5 per cent of their net capital.

Jardine Fleming HNB Securities has also applied to trade on their own account and were awaiting approval.

However neither John Keells nor CT Smith had made use of the provision.

" Brokers aren't entirely confident that the existing rules addresses all the concerns of investors regarding possible conflicts of interest," John Keells Stockbrokers Chief Sudharshan Ahangama said.

"We are also not planning to use the facility as yet," Head of CT Smith Securities Mahendra Jayasekera said.

"In the future we may use it to help clients trade in illiquid shares."

In addition to concerns regarding possible client sentiments, Sri Lankan brokering houses were also poorly capitalized unlike the situation abroad where they functioned as investment banks with a large capital base.

Local regulations required that separate companies be incorporated to deal exclusively in shares resulting in such companies having just enough capital to support share trading activities.

Analysts also say that there is little likelihood of capital being injected into brokering house to deal in shares.

Most large groups of companies had their own investment funds to trade in shares.

This was an easier process than surmounting the regulatory hurdles of trading via a brokering house.


Declining external reserves

Although the position of the country's external reserves is fairly comfortable, there has been a declining trend since 1995 and this has continued in the first five months of this year. It is important for the government to take note of this and ensure that remedial measures are in place to see that the declining trend does not continue. This is particularly important as adequate external reserves are essential to continue with the current liberalised economic policies.

At the end of last year external reserves amounted to US$2441 million. By the end of May they had declined by 5.6 per cent to US$2305 million. This amount of reserves is estimated to be adequate to service about four months of imports of goods and services. 1n 1994 we had reserves adequate to finance about 5 1/2 months of such imports. They fell from SDR 1792m(US$ 2608 m approx) at the end of 1994 to SDR 1729m (US$ 2572 m approx) in 1995 . This declining trend, if unarrested, may create problems in the future.

A notable feature of the decline is that the most significant drop has been in the official reserves component. The official reserves, which were at US$1938 million at the end of last year, declined by over 11.5 per cent to US$ 1715 million - a rather significant dip in a short period. In contrast, private remittances increased by about 4 per cent compared to the corresponding period last year to reach US$ 215 million in the first quarter of this year. Although outflows were somewhat higher in the first quarter of this year, the net position of private remittances has shown an increase.

It is also interesting to note that the decline in reserves has occurred when the terms of trade appears to have been favourable. Tea prices remained at around last year's level, rubber prices too were good and import prices for wheat, sugar and crude oil were less. Besides this, there was an increase in industrial exports. However consumer, intermediate and investment goods imports increased and the trade balance declined by 8 per cent leaving a trade gap of US$ 534 million. This is an increase in the trade deficit by 8 per cent or US$41 million.

This deterioration in the trade balance and the decline in official reserves appear to be the factors responsible for the reduced external reserves. Not unexpectedly the better growth performance this year may have been responsible for increased imports which may be somewhat offset by increased exports later. If there is satisfying evidence that this is so, then there is less reason for anxiety.

The external assets position requires to be closely monitored and early measures taken to ensure that it does not deteriorate any further. It is easier to take remedial action when we still have a fairly comfortable reserve position rather than wait for a further deterioration. The maintenance of a liberalised economy with no exchange restrictions on current transactions implies a need for adequate reserves.

Alternately, the country may have to take measures which are too drastic and hamper economic growth. One such measure would be a drastic depreciation of the currency, especially as trade controls are not possible. With the prospects of the Sri Lankan economy being brighter in 1997, it would be a tragedy if external reserves pose a problem for the continuation of current economic policies. A more effective utilisation of committed foreign aid provides one easy means of strengthening our reserves.


Mind Your Business

by Busines Bug

Ruffling feathers

The man who was minding his own businesses has now been asked to oversee the usually late bird as well.

And true to form, he has started in style, though many feathers have been ruffled already. The man takes it all in his stride saying he has been appointed to do a job of work and not to win a popularity poll.

So, watch out for the next step: a major overhaul of top management....

Going ahead

Stocks of three more plantation companies are to be sold on the Colombo market at a time when stocks, and everybody's hopes, are rising.

But when the Bull run picked up momentum last week, some big wigs wanted the plantation stakes postponed, so a better price could be obtained.

But, sanity prevailed, and the perked up boys said the stocks will be sold on schedule.....

Number one again

Little Lanka, for long the top tea producer in the world lost the top slot to Kenya last year.

But this year, the weather gods have been kind, strikes have been fewer and there is no power shortage.

All this points to a bumper harvest this year and we may be number one again, Tea Board sources say....

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