Ce­ment set for a shake-up?

Com­pe­ti­tion au­thor­i­ties will be pressed to make good de­ci­sions about pro­posed merger

Financial Mail - - MONEY&INVESTING - Mark Al­lix al­lixm@bdlive.co.za

It’s all smoke and mir­rors around a pos­si­ble merger with PPC. The broader view is to build an African ce­ment ti­tan. The Pub­lic In­vest­ment Corp (PIC), which holds 66% of PPC suitor Afrisam, has now bought up a smidgen more than 25% of SA’S big­gest ce­ment maker. With 75% of share­hold­ers need­ing to ap­prove any deal, this has stale­mated more than 25% of PPC share­hold­ers who have re­jected a joint con­di­tional par­tial of­fer from Afrisam and Canada’s Fairfax Africa In­vest­ments.

Apart from Afrisam-fairfax Africa, the mar­ket has lit­tle to go on when it comes to pric­ing a merger — prob­a­bly even less so now that Nige­ria’s Dan­gote has pulled out.

Fairfax Africa has un­der­taken to buy R2bn in or­di­nary shares in PPC at R5.75/share.

The pro­posed merger ra­tio is a share ex­change of 58 PPC shares for 42 Afrisam shares. The con­di­tional par­tial of­fer pro­posal in­cludes a R4bn re­cap­i­tal­i­sa­tion of Afrisam be­fore any merger pro­ceeds.

PPC and some of the group’s big­ger share­hold­ers are far from im­pressed. They say the group is worth be­tween R8/share and more than R10/share, if a con­trol pre­mium is added. “As­sum­ing fair value is around R10/share, con­trol pre­mi­ums are typ­i­cally 25%-35% above the fair value,” says Sam Sit­hole, CEO of Value Cap­i­tal Part­ners, the holder of about 5% of PPC stock. How­ever, any stale­mate over a deal can­not en­dure, de­spite the PIC’S os­ten­si­ble sup­port for the Afrisam-fairfax

Africa bid. The stage is set for a bid­ding war af­ter PPC re­ceived a non­bind­ing ex­pres­sion of in­ter­est from global ce­ment group La­farge­hol­cim. This is set to be fol­lowed by a firm in­ten­tion of­fer in the week start­ing Novem­ber 20.

La­farge­hol­cim — prob­a­bly the world’s big­gest ce­ment com­pany af­ter Hong Kong-listed China Na­tional Build­ing Ma­te­rial Com­pany — has left in­vestors guess­ing whether it is in­ter­ested in PPC’S over­all busi­ness, its SA as­sets, or only its rest-of-africa as­sets — in Zim­babwe, the Demo­cratic Repub­lic of Congo, Ethiopia and Rwanda. Mean­while, La­farge­hol­cim al­ready has sig­nif­i­cant ce­ment op­er­a­tions in SA.

Such al­ter­na­tives cre­ate dif­fer­ent value propo­si­tions for any pos­si­ble merger.

SA’S com­pe­ti­tion au­thor­i­ties will be pressed to make good de­ci­sions in this re­gard. At the very least, PPC share­hold­ers should de­mand this. Afrisam says its cur­rent debt is around R7bn tak­ing into con­sid­er­a­tion both third-party debt with com­mer­cial en­ti­ties and key share­hold­ers — Phem­bani and the PIC.

The com­pany says the R4bn re­cap­i­tal­i­sa­tion by Fairfax Africa is go­ing to set­tle al­most all the third-party debt — bank debt — while there will be con­ver­sion of the R3bn pay­mentin-kind notes held by Phem­bani and the PIC into eq­uity. The group says its eq­uity value is cal­cu­lated on an en­ter­prise value of R7.55bn and net debt of no greater than R866m af­ter a merger on the ex­ist­ing terms.

The value of PPC and any suitor, though, is might­ily clouded by the po­ten­tial broad-based black eco­nomic em­pow­er­ment (BBBEE) share­hold­ing in any merger.

For now, 66% of Afrisam is held by the state-man­dated PIC and 30.5% by the black­em­pow­ered Phem­bani group headed by for­mer MTN CEO Phuthuma Nh­leko. The PIC, mean­while, has just raised its hold­ing in PPC to 25.058% of to­tal is­sued or­di­nary shares.

In its lat­est pre­sen­ta­tion to an­a­lysts on Oc­to­ber 23, Afrisam says the PIC and Phem­bani will add 17% pro forma BBBEE own­er­ship in any merger, with no di­lu­tion to ex­ist­ing PPC share­hold­ers. That is based on 42% own­er­ship of PPC in any merger, with Fairfax Africa hold­ing 60%


of this and the PIC and Phem­bani to­gether hold­ing 40%.

Afrisam says PPC share­hold­ers will need to de­ter­mine whether PPC’S lat­est pro­posed BBBEE trans­ac­tion will be di­lu­tive to them. It says no de­tails have been made avail­able as to the cost of this plan. “Al­ter­na­tive BBBEE so­lu­tions could be costly, in­con­ve­niently timed and po­ten­tially di­lu­tive,” Afrisam says.

In this re­gard, it says Sa­sol lost 7% of its value on the news of its re­place­ment BBBEE trans­ac­tion.

But it ap­pears there are grem­lins lurk­ing around em­pow­er­ment: “As you may be aware, Afrisam is and con­tin­ues to be 100% black owned as in­di­cated in its lat­est ver­i­fi­ca­tion cer­tifi­cate. [But] the down­turn in the econ­omy, com­pounded by the struc­tural changes in the in­dus­try, has ne­ces­si­tated Afrisam hav­ing to pur­sue an ag­gres­sive cost­cut­ting ex­er­cise. This, to­gether with the re­cent changes in the BBBEE codes, has re­sulted in Afrisam hav­ing to drop from level 4 to level 6,” Afrisam says.

It adds that “many” other com­pa­nies have ex­pe­ri­enced sim­i­lar de­clines. “We are in the process of im­prov­ing our score on these el­e­ments and an­tic­i­pate that it will rise again in the next few years.”

Based on these prece­dents, and its own anal­y­sis, Afrisam’s view is that if the merger were to pro­ceed, sub­stan­tial cost sav­ings would be achieved over time for the ben­e­fit of all share­hold­ers. Typ­i­cally, such cost sav­ings and other syn­er­gies are not fully re­alised im­me­di­ately, but are achieved within two to three years of con­sum­ma­tion of the merger, ac­cord­ing to the com­pany.

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