OPINION: PIA privatisation: price, politics, and basic arithmetic |
PIA privatisation has triggered the usual storm of outrage, suspicion, and conspiracy theories. Everyone has an opinion on whether the airline was sold too cheap, too late, or to the wrong party. Much of that noise ignores basic finance. This op-ed attempts to explain the transaction in simple words, so at least criticism can start from the numbers instead of from assumptions.
The valuation realised by the government today from the sale is around Rs55 billion, not just the Rs10 billion cash it is directly receiving.
The globally recognised recognised pre-money equity valuation model has been at play to determine this value. Under this, the total consideration of Rs135 billion has been committed by the buyer for a 75 percent stake. That implies a post-money equity value of Rs180 billion for PIA. Subtract the fresh capital that will go into the company, which is Rs125 billion out of the Rs180 billion.
The result is a pre-money equity value of roughly Rs55 billion that belongs to the existing shareholder which, in this case, is the state.
The second basic point is that one cannot compare any entity solely on the basis of its assets without incorporating liabilities. Financial accounting 101 says assets equal liabilities plus equity. Therefore equity equals assets minus liabilities.
In simple words, if a property is worth Rs1 billion but has a loan of Rs800 million........