PPC shareholders feel relief as share price lifts on interest
Long-suffering PPC shareholders have had a few weeks of cheer. With the cement producer’s share price way off its 2014 levels of more than R30, the company received a formal bid and other indications of interest in September. The action drove the price from R3.75 in August to R6.88 last week. Shareholders are now coming to the view that they deserve more. Such is the ability of an interested suitor to engender self-confidence.
Over the past few years, PPC has faced several boardroom battles, a succession of senior executives and massive capital expenditure in the rest of Africa, which turned out to be badly timed. In 2016, the company was forced to urgently raise new capital from shareholders after its bonds were downgraded to junk. Cement demand has been weak, while aggressive new competitors have entered the market, shredding margins. Capital expenditure has absorbed cash.
But every asset is cheap at the right price. As PPC’s share price fell, potential acquirers took notice. One of those is competitor AfriSam, whose history has also been one of forced recapitalisations, unmanageable debt burdens and operational challenges.
Tying up the two companies, which occupy the top two positions in terms of market share, would at least solve the debt headaches that have bedevilled both companies.
AfriSam has had three goes at PPC. The first, back in 2014, was swiftly dismissed by the PPC board, even though it would have valued the company at four or five times current levels. The second came in February 2017, but was abandoned in August. A week later, the current bid was put on the table, which brings Canadian private equity firm Fairfax into the deal. Fairfax will recapitalise AfriSam with R4bn, buy out up to R2bn worth of PPC shares and merge the two companies. The R2bn partial offer is at R5.75 per share.
The merger ratio for PPC and AfriSam will leave PPC shareholders with about 58% of the merged group, but Fairfax will be the largest shareholder with just over 30%, depending on how many PPC shareholders take up the cash offer.
The PPC share price is now at a premium to the Fairfax offer price. In part that has been driven by talk of other potential bidders. One of those is Dangote Cement, Africa’s second-largest producer and controlling shareholder of Sephaku, another JSElisted producer. Dangote said it was interested but then said it wouldn’t bid, though last week its outgoing CEO, Onne van der Weijde, said Dangote was “still very much interested at the right price”, saying PPC would be a good fit for the company. Other rumoured bidders include LaFargeHolcim, which originally owned AfriSam before exiting through a highly leveraged buyout that has been a millstone for that company, and Irish building materials giant CRH.
PPC shareholders — led by Prudential with 15.2%, Value Capital Partners (5%) and more recently Visio Capital (7%) — have said PPC is worth far more than the deal implies. With more was PPC’s share price last week, up from R3.75 in August
is the share price PPC shareholder Value Capital Partners thinks reflects the group’s worth than 25%, the three investors could prevent the special resolution required for it to happen. Value reckons the company is worth at least R10 per share.
After years of balance-sheetcrushing capital expenditure, PPC is soon to open plants in Rwanda, Ethiopia and Democratic Republic of Congo, as well as several upgrades, which should change the cash performance of the business. At some point the cycle will turn, leading to an uptick in cement prices. Now is not the time to let the company go for a song. On the other hand, a combined group, with a much stronger balance sheet, would be well positioned for strategic acquisitions in the rest of Africa.
The Public Investment Corporation (PIC) is a critical player. It holds 66% of AfriSam and 22.2% of PPC. If the deal goes through, the PIC’s stake in the merged group will depend on the details of who takes up the partial offer. That would allow it to dilute its exposure to AfriSam, which has been a big headache since Holcim’s disinvestment.
Shareholders are braced for the next move. PPC has appointed Investec to undertake an assessment of the offer to determine whether it is fair and reasonable. PPC will announce the results on November 22.
Alternatively, a second serious bid may emerge, either from Dangote or another bidder that prices the company at what shareholders believe it is worth. Fairfax would then have to decide its next move. A hike in the offer terms is obviously what PPC shareholders want.
Fairfax has built some SA deal-making experience, having bought out and delisted Afgri alongside the PIC in 2014. More recently it has acquired Zurich Insurance (since renamed Bryte) and, via Afgri, South African Bank of Athens.
If it does manage to get the AfriSam-PPC deal past shareholders, the next challenge will be the Competition Commission. The two companies command significant market share at a national level, but when this is broken down to provincial level, there is less overlap.
The commission may be convinced that entrants in the market, plus the obvious stress both companies are under, mean the deal is a good idea. Either way, PPC shareholders can look on their asset with renewed enthusiasm.