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Why the PPC, AfriSam tie-up is facing shareholder rebellion

PPC shareholders dig in their heels arguing that the cement group is better as a standalone business.

The proposed merger between SA’s largest cement producer PPC and its unlisted rival AfriSam might be scuppered for the second time as several shareholders have come out voicing their concerns against it.

Shareholders believe that the deal, which has the backing of Canada’s investment holding firm Fairfax Africa Investments, undermines PPC’s potential for future growth in SA and the rest of Africa.

Prudential Investment Managers, Value Capital Partners and Visio Capital Management are opposing the merger.

Prudential, which has a 14% shareholding, has expressed its concerns to the management of PPC and AfriSam, arguing that it sees more value in PPC being a standalone business.

Chris Wood, Prudential’s head of equity, said PPC has made significant 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 have the potential to double the company’s earnings and share price over the next three years.

“We see the potential for PPC ordinary shares to be worth in excess of R12/share within the next three years,” said Wood. 

PPC shares were R6.37/share at the time of writing.

PPC share graph

PPC raised R4 billion last year through a rights offer to help deleverage its balance sheet, reducing debt from R9.2 billion to R5.7 billion as of March 2017.  

Activist investment firm Value Capital Partners supported Prudential’s views in its opposition to the merger. 

The firm, which owns 5% of PPC, has put an intrinsic value of at least R10 to PPC shares based on its balance sheet after the rights issue and presence across Africa. On the latter, Value Capital Partners CEO Sam Sithole, said PPC will generate nearly 50% of its profits from the rest of Africa in the next two to three years.

AfriSam needs PPC

Prudential’s house view is that the merger would benefit AfriSam more than PPC. “AfriSam needs to be recapitalised and the current shareholders of AfriSam appear unwilling to inject further capital,” said Wood.

AfriSam received bailouts from several shareholders in 2012 after facing a smothering R15 billion debt load. At the time, AfriSam’s recapitalisation included the Public Investment Corporation (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.

PPC shareholders have been largely in the dark about AfriSam’s debt and cash generation position since the merger was initially touted in February.

Visio Capital Management, which has a 7% stake in PPC, said a successful merger would distract PPC’s management from boosting operational efficiencies. It’s also concerned about the hurdles that the merger could face in getting the approval of competition authorities – a process that could take over 12 months.

“Visio wishes for PPC to walk away from this deal, to stop wasting valuable management time and company resources towards an uncertain and very likely messy outcome and to instead focus on its own operations and deal with its own challenges,” it said.

Rejecting share purchase offer

A bidding war has since ensued, with Fairfax and Nigeria-based Dangote Cement offering to tie-up with PPC to cement the AfriSam deal. On Friday, Dangote walked away from a potential takeover of PPC, leaving Fairfax as the sole known bidder. Fairfax has backed PPC in its bid for AfriSam, offering to acquire PPC shares worth R2 billion for R5.75/share if shareholders back the merger.

However, the Fairfax offer won’t likely pass muster with shareholders.

Three shareholders holding more than 25% of PPC have opposed the merger, said PPC chairman Peter Nelson. This is a massive snag as the deal requires 75% of shareholder support for it to be successful.  “We have not polled shareholders but there are a number of shareholders who have indicated their concerns,” Nelson told Moneyweb.

Shareholders have also taken umbrage with Fairfax’s R5.75/share, which is based on PPC’s earnings before interest, tax, depreciation, and amortisation of R2 billion for the year to March 2017.

Value Capital’s Sithole said Fairfax’s offer materially undervalues the company given its cash generation potential. “At an offer price of R5.75/share, we would be buyers, not sellers of the company, as the business is worth almost double that,” he said. “Share price and intrinsic value of the business are two different things. As owners of PPC, we are not interested in the short-term share price levels and are happy to keep our business for the long-term value creation for shareholders.”

Said Prudential’s Wood: “Fairfax is offering PPC shareholders the opportunity to bank a short-term gain but in doing so, risk transferring significant value to the consortium comprising Fairfax, PIC and Phembani, who will end up controlling 55% of the combined entity.”

The PIC’s position

The PIC, the largest shareholder of PPC holding a 15.17% stake, is said to be supporting the Fairfax-backed offer according to a Bloomberg report. However, SA’s largest money manager has denied this. 

“The PIC has not been approached by the PPC board with any proposed offer for PPC shares. We will be in a position to express a view after we have been approached with a proposal and have studied the terms thereof,” said Deon Botha, the PIC’s head of corporate affairs.

The PIC also holds a majority stake of about 60% in AfriSam. Shareholders have questioned whose interest will the PIC serve with the merger given its shareholding in both PPC and AfriSam.

Read: PPC and AfriSam: What an ugly couple

PPC says AfriSam’s new merger proposal falls short

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