Bumping heads for PPC
The cement maker is flavour of the month — and at least one investor says it’s worth far more than the current offer
So whose side is the Public Investment Corp (PIC) really on in the battle of the cement giants — SA’S largest cement producer PPC or its smaller rival Afrisam?
This week the PIC raised its stake in PPC, which is being courted by numerous suitors, to 21%. It’s an extraordinarily large punt on the ailing cement sector, considering the PIC already owns two-thirds of debt-laden Afrisam.
The PIC was sparked into action by Canadian insurance group Fairfax, which emerged from nowhere a few weeks ago with an offer to buy R2bn of shares in PPC (at R5.75/share) — but on condition that PPC merged with Afrisam.
Only, since its plan first came to light on September 4, PPC’S shares have soared 26% to R6.90 — far beyond the offer price. This was spurred, in part, by the prospect of a bidding war, as African giant Dangote emerged with its own offer, as did Irish group CRH.
Either way, it seems Fairfax’s offer is dead in the water — which should please the PIC, if it was hiking its stake in PPC as a blocking tactic.
The sudden ardour for cement implies that PPC has been undervalued for some time.
This is certainly the view of Sam Sithole, one of the founders of Value Capital Partners, which has quietly been buying up PPC stock. Sithole’s company, along with investment managers Visio Capital and Prudential, hold more than 27% of PPC — and they wouldn’t be happy to part with the company at such a low price.
Sithole is adamant that PPC is worth a minimum of R10.82/share. He says by the time it comes to vote on Fairfax’s offer, easily half of the company’s shareholders will reject it.
“The only reason why this deal is still on the table is probably for Afrisam. It doesn’t have any other choice. It has too much debt; its shareholders either don’t have the money or are refusing to put more money in, and for them this is the only option,” he says.
Sithole estimates that Afrisam has shareholder loans of just over R3bn and bank debt of about R5.7bn. “If Fairfax believed in the business [case] for Afrisam, what it would do is put its money into Afrisam. Fairfax doesn’t want to do that – so it says it will put money into Afrisam [only] if it can get PPC.”
Sithole’s company is a self-styled activist shareholder, whose plan is to invest in companies it considers undervalued. It has recently taken stakes in Altron and Adcorp. In the case of PPC, Sithole’s company invested in PPC when the price tumbled to R4/share in recent months.
Because PPC has been through the wringer with management shuffles, a rights offer and a market slump, Sithole says it is one of the bestplaced industrial firms — despite being challenged by Sephaku and Mamba.
These new entrants played a risky game to win market share. “What all these guys did was to be aggressive on the price to squeeze margin so they could win market share. Our calculation is that [they’re] now at full capacity, and they are at full capacity in terms of the debt within their businesses. They don’t have scope to continue to play the pricing game,” says Sithole.
PPC has between 23% and 25% of SA’S market. Says Sithole: “When you are a dominant player, it’s actually a very powerful position.”
Quite how Value Capital calculates PPC’S value is interesting. Sithole estimates that the replacement cost of PPC’S capacity is almost R22bn. “If you take out the debt in PPC of about R4.7bn, you end up with an equity value of R17.2bn — equal to at least R10.82/share.”
Fairfax, he says, hasn’t taken into account PPC’S African expansion plan in its offer.
PPC