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Fairfax said to back AfriSam to clinch PPC deal

Insurer to give R5 billion cash injection to help pay off cement maker’s bank debt.

Fairfax Financial Holdings is prepared to inject as much as R5 billion ($386 million) to pay off bank debt owed by AfriSam Group and help South Africa’s second-biggest cement producer clinch a tie-up with larger rival PPC, according to two people familiar with the matter. 

The money from the African unit of the Canadian insurer will be used to repay bank loans and allow AfriSam to push through a new offer to PPC, according to the people, who asked not to be identified because the details are private. The new proposal could be made at a premium of as much as 35% on PPC’s average share price over the past 30 days, one of the people said.

Talks are also underway that might result in the writing down of R3 billion of debt by the Public Investment Corporation, Africa’s largest money manager, the people said. The debt is held in financial instruments known as payment in kind notes, which typically allow a company to pay off interest with additional debt or equity. The cash injection from Fairfax Africa would come days after previous talks about a combination failed and would help ensure that AfriSam does not default on its debt obligations, the people said.

Read: PPC shares fall after cancellation of proposed merger with AfriSam

PPC plans to issue a statement later on Monday, the Johannesburg-based company said in an emailed response to questions, declining to give further details. Telephone calls made to Fairfax’s offices in Toronto outside of normal office hours weren’t answered. Spokesmen for AfriSam and the PIC said they couldn’t immediately comment.

Bank bet

The African unit of Fairfax, which started a fund of about $500 million for investments on the continent earlier this year, will get an equity stake in AfriSam for the cash injection, the people said. Fairfax Africa last week completed the purchase of a 42% stake in Atlas Mara, the company co-founded by former Barclays Plc chief executive officer Bob Diamond. The company, which trades in London, owns banks across seven African countries and has declined 77% since an initial public offering in December 2013. 

Fairfax, which has almost $44 billion in assets and is known for its contrarian wagers, has also made other purchases in Africa, including a 7.4% stake in Commercial International Bank Egypt SAE and investments in agricultural company Afgri Operations, Africa Re, APR Energy, and Zurich Insurance Group’s South African business, which it rebranded Byte Insurance.

Junk rating

Merger talks between Johannesburg-based PPC and AfriSam were first announced in December 2014, then called off a few months later before being revived in February this year. The initiation of fresh negotiations came after a turbulent year for PPC, which was forced to raise R4 billion in a rights issue after S&P Global Ratings cut its debt to junk, triggering early redemptions by bondholders.

Read: PPC prices $281m rights issue at R4 a share

The latest talks broke down after the companies couldn’t agree on how to value the deal, PPC chairman Peter Nelson said on August 25. Banks including FirstRand’s Rand Merchant Bank and Old Mutual’s Nedbank have already allowed AfriSam extensions on some of their loan repayments, the people said.

The PIC, which oversees about R1.9 trillion in mostly South African civil-servant pensions, owns about 60% of AfriSam. The second-largest shareholder is Phembani Group, the investment company co-founded by MTN Group chairman Phuthuma Nhleko, with a 31% stake. Nhleko is also chairman of AfriSam.

PPC shares reversed earlier losses to gain as much as 3.9% before trading unchanged at R5.45 as of 12:40pm in Johannesburg. The stock has declined 1.5% this year, valuing the company at R8.7 billion.

© 2017 Bloomberg

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