Sri Lanka’s Laugfs Holdings, a privately owned gas company which was beaten by the state in a deal to acquire the local unit of multinational Shell Gas, has now set eyes on managing the new state owned gas company, a senior official said.

“It’s in the proposal stage and surely it will happen,” said W K H Wegapitiya, chairman of Laugfs Gas Holdings.

“In fact I personally discussed with his excellency the President. He said we want to support the local entrepreneurs.”

“The government will keep the ownership up to a certain extent and would allow it to be managed like a private commercial oriented organization.”

Laughfs Gas private limited is a fully owned subsidiary of Laugh Gas Holdings, which has business interest in supermarket, petroleum, lubricants, real estate, modern trade, leisure, solid tyres, emission testing & value added coir.

Gas Monopoly

Wegapitiya’s proposal, if inked to a deal by the government will monopolize the Sri Lankan gas market. Monopoly’s hurt consumers, as a single seller with no competition that can up prices and sacrifice quality with no one to challenge.

Monopolies are against free market principals of many players in a single market.

Sri Lanka’s gas market prior to the government was a duopoly enjoyed by Laugfs and Shell.

Laufgs to date lays claim to 30 percent share of the domestic cooking gas cylinder market, 60 percent of industrial gas and 90 percent of auto gas.

The government granted a five year monopoly to the Anglo Dutch gas firm Shell which ended in 2001 when Laugfs stepped in as the only local rival.

The 37 US dollar investment by Shell was used to build a port delivery terminal and boost distribution network which was in tatters in 1995.

Sri Lanka suffered frequent shortages of gas and new cylinders were not available to prospective new customers when gas distribution was a government monopoly.

The government, had a 49 percent stake of Shell Gas.

On Wednesday the state announced a policy decision to acquire the balance 51 percent from Shell which is looking to exit its Asian operations.

State owned BOC (Bank of Ceylon), Peoples Bank, NSB (National Savings Bank) and SLIC (Sri Lanka Insurance Corporation) is financing the 63 million dollar takeover deal.

Laugf also had announced plans to acquire the controlling stake in Shell, but was shunned by the authorities in fear of monopolization.

 

“If a foreign company can hold and own a monopoly why can’t a local company?” questioned Wegapitiya.

However he says the government which has been out of the business of distributing gas for the last one and a half decades will be compelled to outsource the management of the new gas company.

“The government had principally decided that when they take over, it will need the contribution of the private sector to manage it,” he said.

“In this country we are the only company which has got the experience and the knowledge. So therefore we will anyway be in a better position to manage it.”

Wegapitiya says he does not want to encourage a monopoly but and added that agreement will lead to a lot of synergies improve efficiency at both entities.

“At the moment certain infrastructure facilities like the terminal is being exclusively used by Shell. Now when it’s owned by the government we both can use it. So our cost of operation will come down and their return on investment will be high.”

The government, a day after acquiring the controlling stake at Shell, announced the sale of the balance 49 percent to the public.

“We proposed to the government that we are willing to buy it back from the government. The government should not compete with the private sector,” said Wegapitiya.

 

Public Offer

The liquid petroleum gas supplier recently announced plans to raise 2.5 billion rupees in an initial public offer opening on November 04, 2010.

Wegapitiya said about one billion rupees of the cash raised will be used to retire debt while the rest will be used to expand operations.

Laugfs Gas will offer for subscription 75 million ordinary voting shares at 23 rupees a share, to raise 1,725 million rupees, and 52 million ordinary non-voting shares at 15 rupees each to raise 780 million rupees.

State-owned Merchant Bank of Sri Lanka is managing the issue, while brokering firms, Capital Alliance and Asha Phillip Securities are the joint placement agents

Laugfs currently has a distributor network of 1,600 dealers across the island which it hopes to expand up to 2,500 by end next year, Wegapitiya said.

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