If the merger of SA’s two largest cement makers PPC and AfriSam is successful, it would benefit shareholders of both companies as the combined entity would have better buying power from suppliers and an improved route-to-market.
This is the view of AfriSam’s acting CEO Rob Wessels, who is pushing for the merger to go ahead despite it facing strong opposition from PPC shareholders.
Wessels said the cement industry in SA and globally has been consolidated – notably, with the merger of Holcim and Lafarge in 2015, Germany’s HeidelbergCement acquiring a 45% stake in Italcementi in 2016 and others – resulting in the creation of dominant cement producers that have the muscle to compete in many markets.
The industry has been buckling under weak cement demand and excess supply. Figures from PPC show that cement capacity was 19 million tons in 2016 but demand was only 14 million tons. Industry players expect overcapacity of between 20% to 30% in the next three years.
“Our view is that the combined entity is going to be better placed to compete effectively with a strong balance sheet. We believe that we would be at a much better place to survive the economic headwinds.”
Wessels’ argument, however, is not flying with PPC shareholders.
More than 25% of shareholders – among them Prudential Investment Managers, Value Capital Partners, and Visio Capital Management – are opposed to the merger. This is a massive snag as the deal requires 75% of shareholder support for it to be successful.
Canada’s investment holding firm Fairfax Africa Investments has backed PPC in the proposed merger by undertaking to buy R2 billion worth of PPC shares at R5.75/share. Fairfax included a R4 billion recapitalisation of AfriSam before the merger is even cemented.
PPC shareholders said AfriSam is more in need of a merger, as its current shareholders appear to be unwilling to inject further capital into the company.
Wessels rejected this, saying there’s a history of shareholders that have supported AfriSam.
“It’s quite unfair to say there isn’t support now by shareholders. We now have Fairfax, a long-term investor. This is a pretty attractive offer given the current economic conditions and the state of some of our markets.”
Fairfax’s offer of R5.75/share for PPC shares is at the centre of the shareholder opposition to the merger as they believe it undervalues PPC, which has the potential for its share price to double to R12/share due the company’s new capacity investments in SA and rest of Africa.
Wessels said the Fairfax offer “makes good sense for both AfriSam and PPC shareholders”. AfriSam has a debt of about R5 billion and a further R3 billion owed to shareholders, he said. Existing AfriSam shareholders would be asked to convert their debt into equity and including the R4 billion Fairfax cash injection, the company would be “virtually debt-free”.
“The merger is quite compelling for PPC shareholders because we would bring a much lower level of pro rata debt into the deal which would make the combined balance sheet stronger. This would give the combined entity the opportunity for further acquisitions to knit our complementary assets together.”
The synergies between both companies exist.
PPC recently commissioned new plants in Zimbabwe, the Democratic Republic of Congo, Ethiopia, Rwanda, which are expected to add a third to its annual output of 8 million tons/year and boost group profits from the rest of Africa to nearly 50% in the next two to three years. AfriSam brings its 63% stake of Tanzania’s Tanga Cement, which produces 1.25 million tons/year of cement for the East Africa region.
According to AfriSam, a successful merger would result in a pre-tax savings of R800 million based on the combined revenues of AfriSam and PPC. PPC shareholders criticised this saying the potential cost savings assume that the transaction would go ahead without conditions imposed by competition authorities.
The combined entity is expected to have a 65% to 70% cement market share in the inland region and a national market share in excess of 45%, which could face competition hurdles including asset sales.
Wessels said competition implications could be managed.
The big question is if AfriSam would survive and be able to withstand market challenges if the proposed merger sinks. Wessels thinks so.
“We’ve been around for over 80 years and have been through many good and tough times. Cement is always needed to develop countries. But we will have to be patient.”