Holed like a Swiss cheese

Posted On Thursday, 26 April 2007 02:00 Published by
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We may never know why Aveng decided to abandon its 46% stake in Holcim SA. After seven months of "constructive engagement" with Swiss partner Holcim Switzerland, Aveng has decided to take R6,8bn in cash and walk away. The trigger is the contentious black economic empowerment (BEE) deal that was sprung on Aveng by the Swiss in August last year. Holcim Switzerland holds the balance of Holcim SA shares.

Construction IndustryWas there political pressure for the deal after SA's president displayed interest in the transaction? There were also mutterings that Aveng's largest shareholder, the Public Investment Corp, was "supportive". In a JSE statement, Aveng said its strategy was "to achieve operational control over or have a controlling interest in all of its major investments... the disposal at an implied enterprise value of R16,4bn represents an attractive exit opportunity."

But to wait more than 60 years (the length of Aveng's association with Holcim) to decide you would like control is a somewhat delayed reaction. In any event, the Aveng/Holcim empowerment saga brings an expected bonus for Aveng shareholders (R3bn will be returned).

Empowerment partner Afrisam will no longer be paying R6,8bn for 85% of 54%, as in the original deal. Rather, Afrisam will now have to find R13,94bn (85% of R16,4bn). And the Swiss will have to buy Aveng's shares in order to put Aveng's stake, along with its own, into a vehicle (Altur) that can be presented to debt funders for appraisal.

This would be ironic because the Swiss made it clear they were not interested in providing finance for the transaction.

With this level of debt encumbering the balance sheet and sucking up every cent to service loans, will Holcim SA be able to make the investments it needs to avoid losing market share and margin? Mark Ingham, an independent analyst, says the economics of the deal has more holes in it than a Swiss cheese.

Putting a brave face on it, Afrisam says: "Though the headline funding requirement to provide for both the Aveng buy-back and Holcim's BEE transaction has now increased, the funding structure has been simplified with Aveng's exit." A degree of vendor financing now looks like a possibility. Ingham says the deal in effect offers Aveng a 19 price:earnings ratio. He says Holcim's listed rival PPC must have been used in deriving a value - and to the benefit of Aveng, since PPC as a business is far superior to Holcim.

Aveng should return all of the R6,8bn in cash to shareholders. Ingham says it would prejudice shareholders to have more money pumped into Aveng businesses such as Grinaker-LTA and McConnell Dowell, which have delivered "underwhelming performances".

Ingham says an unintended consequence of the deal will be to expose other weaknesses in Aveng. The margins that Holcim provided were cover for mediocre performances in other divisions.

There is no obvious acquisition opportunity for Aveng. Besides which, Ingham says, it needs to sort out difficulties in businesses it already owns. "They need to convince us they know what they're doing with the money," he says.

Other analysts have praised the deal because of the price Aveng has secured and because of the empowerment credits gained for enterprise development.

But this outcome is surely second prize for Aveng. Holcim is a cash-generative business, and demand for cement will grow strongly for years. Asked why Aveng walked away, Ingham says: "It makes no sense; they were the kingmakers. They held all the cards. Maybe they didn't play hard ball enough."

Aveng CEO Carl Grim has refused to talk until the shareholder circular is finalised, which should be early next month.

 

Last modified on Wednesday, 16 October 2013 21:24

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