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High noon looms for PPC/AfriSam merger

A bidding war over a tie-up between both cement producers, which already faces major shareholder rebellion, is expected.
PPC shareholders are expected to be presented with a firm offer by LafargeHolcim and CRH on Wednesday in a merger proposal that has already seen several shareholders come out to voice their concerns about it. Picture: Supplied

Shareholders of SA’s largest cement producer PPC have reiterated calls that a proposed merger with unlisted rival AfriSam must offer long-term value for it to pass muster.

Global cement companies have been keeping a close watch and a bidding war for PPC is expected to rage on with Switzerland’s cement group LafargeHolcim and Irish building materials CRH entering the fray.

The entrance of both companies adds to the partial offer for PPC’s assets by Canada-based investment holding firm Fairfax Africa Investments. 

Read more on the proposed merger:

PPC’s biggest shareholder is said to back Fairfax-AfriSam offer

Cement merger ‘will benefit’ AfriSam, PPC shareholders

PPC shareholders are expected to be presented with a firm offer from LafargeHolcim and CRH on Wednesday in a merger proposal that has already raised concerns of several shareholders.

PPC’s independent board has been engaging with LafargeHolcim, CRH, and Fairfax on their offers over the last month.  

Not only does the merger face major shareholder rebellion for valuation reasons but also competition authorities might scupper it as the combined entity would control almost half of SA’s cement industry.

At the centre of the revolt is Fairfax’s offer to buy R2 billion of PPC ordinary shares at R5.75/share, which is significantly lower than the R8 to R10 fair value ascribed by shareholders.

At least 25% of PPC shareholders opposed the tie-up, among them Prudential Investment Managers, Value Capital Partners, and Visio Capital Management.

Shareholders believe the proposed merger undermines PPC’s potential for future growth in SA and the rest of Africa.

Chris Wood, the head of equity at Prudential, said it will give consideration to any firm offer for PPC. “However, our acceptance of any such offer will depend on whether our analysis of the value unlocked through a sale, exceeds our estimate of PPC’s long-term value of remaining independent.”

Prudential, which recently raised its stake in PPC to 15.18%, believes that the Fairfax offer undervalues PPC as its share price has the potential to appreciate to R12/share in the next three years from R6.47/share at the time of writing.

 

PPC share graph

 

The R12/share valuation is based on PPC’s recent investments in new and more efficient productive capacity in SA and the rest of Africa including Rwanda, the Democratic Republic of Congo, Ethiopia and Zimbabwe, which are expected to contribute nearly 50% of group profit within two or three years.

Sam Sithole, the CEO of activist firm Value Capital Partners, which owns 5% of PPC, supported Woods’ view saying it would only consider a “fair value” offer.

He has put an intrinsic value of at least R10 to PPC shares based on the company’s recent R4 billion rights offer that reduced its debt from R9.2 billion to R5.7 billion as of March 2017, and presence across Africa.

The big elephant in the room is how the Public Investment Corporation (PIC) would vote in the merger proposal and whose interest it would serve as it’s a shareholder in both PPC and AfriSam.

The PIC holds about 66% of AfriSam and has recently upped its stake in PPC from 21.22% to about 25%, a critical level that gives SA’s largest money manager the muscle to push through the merger and veto objections to it. Moneyweb has learned that the PIC supports the Fairfax-backed offer, but Deon Botha, the PIC’s head of corporate affairs said it would express a view after being approached with an offer.

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