PPC, AfriSam merger on the cards



11-12-2014
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Moneyweb
Source

Market indicates approval, but will competition authorities?

The share price of cement producer PPC was up 3.75% by mid-afternoon on Wednesday, shortly after a possible merger was announced between PPC and unlisted cement producer AfriSam.

The announcement, issued just after 13:00 pm, advised shareholders that the PPC board has received a conditional, non-binding proposal from AfriSam for a merger.

In its Sens announcement, PPC said: “The Board is considering the indicative proposal and will make a further announcement in due course once it has concluded its consideration of the indicative proposal. The indicative proposal, if implemented, may have a material impact on the price of the Company’s shares. Accordingly, shareholders are advised to exercise caution when dealing in securities of the Company until such time a further announcement is made.”

Sanlam Private Investments (SPI) equity analyst Olof Bergh said the proposed merger may be the result of the current over-supply in the cement market as well as AfriSam’s historic high debt levels.

He says imports currently account for 12% of the domestic market and capacity utilisation of local producers is at 60%, which is way below the 80% target. The local market is also not showing much growth.

In these conditions margins are being squeezed and AfriSam’s debt repayments may have become an unbearable burden.

PPC has about 40% of local production capacity and a strong balance sheet. It may be interested in consolidation of the market at the right price, Bergh said.

Andries van Heerden, CEO of listed Afrimat, one of the big customers to the cement industry, says the proposed transaction will be a good consolidation of the industry in the face of destructive overcapacity.

He says both companies have good skills and a very strong South African cement producer could be established by the merger. “It may be the second strongest African cement producer after Dangote,” Van Heerden said.

Bergh says passing all the hurdles at the competition authorities may be, apart from price, the biggest obstacle for the proposed merger.

Other industry players agreed, saying if the authorities give their approval it may mitigate the dominance of the merged company through conditions forcing the companies to sell some of its assets. This may include cement poduction plants serving markets in the northern provinces.

As those assets become available, new entrants like Mamba may see the opportunites to buy rather than build, unless it is too far down the road with the construction of new facilities. That may counter further overcapacity in the industry.

PPC just came out of a destructive boardroom battle between the current board and the former CEO Ketso Gordhan in which financial director Tryphosa Ramano played a central role. It is still to appoint a permanent successor for Gordhan.

AfriSam has been saddled with huge debt in a much criticised BEE deal in 2006/07 that collapsed in 2012. The Public Investment Corporation (PIC) stepped in to save the company. Its debt has been restructured since and was estimated at R6.5 billion in 2013. The PIC was still holding about 66% of AfriSam at that stage.

The PIC has pronounced its support for the porposed merger between cement producers PPC and AfriSam.

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