PPC looks ripe for a takeover

Posted On Monday, 13 July 2015 19:46 Published by
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The 30% drop in the share price of cement maker PPC since January bodes well for the ambitious industrialists at the Pembani Group.

 

Kennedy Bungane

The 30% drop in the share price of cement maker PPC since January bodes well for the ambitious industrialists at the Pembani Group, which runs its slightly smaller rival, Afrisam. PPC is ripe for a takeover, and Pembani has made it known that it has not been discouraged by the PPC board’s rejection of its December bid to merge the two operations.

Pembani owns 30% of Afrisam and has effective control of the cement producer through a management pact with the Public Investment Corp (PIC), which owns 66%. At R18,70/share, the PPC stock is trading 25% lower than the R24,54 at which it closed on the day Pembani launched its bid last year. After some consideration, the PPC board rejected the unsolicited and nonbinding proposal in March. This could turn out to be a costly mistake as the board did not consult with shareholders on the proposed deal.

Cutting shareholders out of the decision-making process was the same tactic used by drug maker Adcock Ingram’s board when the Bidvest Group came knocking with a takeover offer. A year later Bidvest was its largest shareholder, and most of the management team was unceremoniously booted out.  A similar fate may befall PPC if Pembani, chaired by  Phuthuma Nhleko, decides to approach investors directly. After all, that is exactly how Pembani ended up with its stake in Afrisam.

Afrisam was created in 2007 when a BEE consortium led by Bunker Hills Investments was established to purchase 85% of the equity held by JSE-listed Aveng and Swiss-traded Holcim Ltd in Holcim SA. Holcim retained 15%. As a result of market contraction during the global economic crisis, Afrisam’s revenue streams dried up and it was unable to service the debt. Pembani made an offer to acquire Bunker Hills’ 37% share in 2011, which it declined. Then Pembani bought about R6bn in Afrisam debt from various offshore banks, and converted it into Afrisam equity. The PIC followed suit, and diluted Holcim and Bunker Hills’ combined investment to less than 2%. Pembani CEO Kennedy Bungane is noncommittal when asked about PPC’s prospects. He reckons the market will have to respond to soft cement demand because of low construction activity and the entry of new players like Sephaku Cement, which has disrupted the industry. Foreign producers like Afghanistan’s Lucky Cement have also been accused of dumping cheap products onto the market.

Consolidation might be the answer. In December Pembani proposed an Afrisam/PPC partnership, in which PPC investors would retain a majority stake, and which would cater to half of the SA market. But it is the business in the rest of continent that will benefit most from a merger. Afrisam’s Tanga Cement in Tanzania, combined with PPC’s subsidiaries in Ethiopia, Rwanda, the Democratic Republic of Congo and Zimbabwe, could pose a threat to Nigeria’s Dangote Cement dominance in Africa.

The presence of Nhleko as Afrisam chairman and possibly of a combined entity would help lend credibility and currency to an Afrisam bid for PPC, says David Couldridge, a portfolio manager at Frater Asset Management “He’s been there [in Africa] and done it before. Nhleko has got the track record of investing in Africa [as former MTN Group CE],” says Couldridge. “Most critical would be the strategy for how the combined group would reduce operational costs.

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