The collapse of merger talks between SA’s largest cement titan PPC and its smaller rival AfriSam has left SA’s seasoned deal-maker Phuthuma Nhleko with an R8 billion headache.
Nhleko – who is AfriSam’s chairman – was pushing for a merger with PPC that would create a sizable cement entity in sub-Saharan Africa. The combined entity was expected to compete in SA’s cement market that has buckled under weak cement demand and excess supply, have better buying power from suppliers and an improved route-to-market.
Besides, the deal had to work for Nhleko, who has played a critical role in growing MTN from its South African home market to become a global telecommunications giant since he was first appointed as its CEO in 2002. Nhleko’s Phembani Group owns 30.5% of AfriSam.
However, even Nhleko’s nimble deal-making skills couldn’t help cement the merger between PPC and AfriSam.
Nhleko and AfriSam pulled out all the stops to make the merger work – even joining forces with Canada-based investment holding firm Fairfax Africa Investments. Toronto Stock Exchange-listed Fairfax offered to purchase R2 billion of PPC ordinary shares at R5.75/share. Fairfax added a sweetener: if PPC shareholders approved the merger, it would inject R4 billion into AfriSam and help reduce its debt.
However, the merger sunk for the second time since 2014 after Fairfax walked away from purchasing a portion of PPC ordinary shares on Friday.
The merger was doomed from day one, with more than 25% of PPC shareholders rejecting Fairfax’s offer as they believe it significantly undervalues the company’s shares. They ascribed an R8/share to R10/share fair value, if a control premium is included.
Shareholders also said PPC’s share price could accelerate to R12/share in the next three years given the company’s recent investments in new and more efficient cement productive capacity in SA and the rest of Africa including Rwanda, the Democratic Republic of Congo, Ethiopia and Zimbabwe. These countries are expected to contribute nearly 50% of group profit within two or three years.
A successful merger would have seen the Fairfax consortium, including the Public Investment Corporation (PIC) and Phembani, end up with a controlling stake of 55% in PPC, without having paid any control premium, Prudential Investment Managers, which holds 15.18% of PPC, argued.
The collapsed merger is more of a problem for AfriSam than PPC. As Chris Wood, Prudential’s head of equity, puts it: “AfriSam needs to be recapitalised and the current shareholders of AfriSam appeared unwilling to inject further capital.”
AfriSam owes about R5 billion to banks and a further R3 billion is owed to shareholders (a total of R8 billion of debt), according to the company’s acting CEO Rob Wessels.
The debt was accumulated over the last ten years, with management rolling out its R6.3 billion capital expenditure in new cement production capacity in SA and the rest of Africa, and upgrading existing plants. AfriSam’s purchase of a more than a 50% stake of cement supplier Holcim SA in 2007, through a Black Economic Empowerment (BEE) consortium, deepened its debt position.
AfriSam’s management pinned their hopes on the R4 billion cash injection from Fairfax. Existing AfriSam shareholders – the PIC owning 66%, Phembani (30.5%) and the balance held by a BEE investor Bunker Hills Investments – would be asked to convert their debt/loans into equity and including the R4 billion from Fairfax, the company would be “virtually debt-free”, said Wessels in a recent Moneyweb interview.
AfriSam said it could not comment on its debt reduction plans.
But with Fairfax walking away, AfriSam’s debt reduction ambitions hang in the balance and existing shareholders might be requested to take on the debt load again.
AfriSam narrowly escaped bankruptcy by receiving bailouts from several shareholders in 2012 after facing a smothering R15 billion debt load. At the time, AfriSam’s recapitalisation included the PIC investing R9.3 billion, Phembani injecting an undisclosed amount that scored it a 30% stake and Holcim Switzerland writing off R3.5 billion of its debt.
Charl Kocks, corporate governance expert at Ratings Afrika, said shareholders might be asked to convert their debt to equity to keep AfriSam afloat or the company might look for a suitor to acquire it.
The true test for converting debt into equity would be the PIC and whether it might see merit in holding more equity rather than debt. Another consideration is that issuing more shares might dilute existing shareholders, to their dismay.
“Either way, , in our view the road ahead is murky for AfriSam,” said Kocks.