What value would the South African Cement giant add to Dangote Cement?
News broke on Friday that Aliko Dangote, Africa’s richest man, and owner of Pan African firm Dangote Cement (DangCem) is among those considering counteroffers for PPC Group Ltd, South Africa’s largest cement maker.
Dangote Cement currently has operations in about 14 African countries including South Africa through its 64 percent shareholding in Sephaku Cement.
So why would DangCem engage in what would amount to a bidding contest for, PPC? Businessday Market Intelligence research throws up a couple of reasons.
Fig 1 : Summary of Sephaku Cement 2016 operations
Dangote Cement Plc bid for PPC is a way to increase its visibility in the South Africa and surrounding SADC market.
PPC offers the prospect of a much larger business than DangCems current operation in South Africa through Sephaku Cement.
Data from Pretoria-based Sephaku Holdings (owners of the remaining 36% stake in Sephaku Cement) Annual Financial Statement for the full Year ended March 31, 2017 shows that Sephaku Cement had revenues of R2.28 billion ($178 million) in 2016 (see Fig 1).
This compares to PPC which had revenues of R9.6 billion ($748 million) in 2016, about four times that of Sephaku.
Obviously DangCem would love to own the bigger company and has signalled it would be open to a sale of all or part of its cement operations in Sephaku Cement to win regulatory approval for a takeover.
While Africa’s second largest economy South African is in a bad shape it is still the continent’s most-industrialized economy and the gateway to the larger SADC economic zone.
In July, South Africa’s central bank halved its economic growth prediction for this year to 0.5 percent.
However South Africa’s GDP expanded 2.5 percent in the second quarter, ending the second recession in almost a decade.
Owning PPC would give DangCem a leading role in an important African economy worth north of $350 billion.
DangCem may be putting in the bid offer for PPC as a means of playing offense against its major rival in Nigeria, which is Lafarge.
Lafarge Holcim is the second largest cement maker in Nigeria and recently consolidated its South African and Nigerian operations in a single company (Lafarge Africa) which is listed on the Nigerian Stock Exchange (NSE).
LafargeHolcim Ltd, the world’s biggest cement maker based in Jona, Switzerland, is said to be monitoring the fast moving potential PPC deal.
Maintain Africa cement advantage
While DangCem is a small fry compared to global cement giants’ 42.5 million metric tonnes of capacity, compared to 368.5 million tons for Lafarge Holcim, DangCem is still the market leader in Africa, due to its aggressive expansion over the past decade into Sub Sahara Africa.
PPC makes 70 percent of its revenue from South Africa with the rest coming from DRC, Ethiopia and Zimbabwe.
The firm recently opened a Zimbabwe mill and projects in Ethiopia and Democratic Republic of Congo (DRC) increased its cement capacity by 33 percent to 11.4 million tonnes per annum in 2016.
Acquiring PPC would complement DangCems strategy for Africa expansion.
Keep Foreign Cement makers at bay
The future ownership of PPC came up for grabs after merger talks with domestic rival AfriSam Group Pty Ltd failed for a second time last month following two-and-a-half years of on-off negotiations.
Both companies have been struggling with high debt levels, which Toronto, Canada based Fairfax Financial Holdings Ltd offered to resolve with its unexpected entrance into the bidding war last week.
The company said it would recapitalize AfriSam, enabling it to settle outstanding loans, and buy 2 billion rand worth of PPC shares at 5.75 rand each.
The bid from Fairfax is said to have sparked the interest of Titan Cement Co. SA of Greece which is also said to be looking at PPC.
DangCem may be trying to keep foreign firms like Fairfax and Titan out of a region it sees as its home turf.
Fig 2: DangCems statement of cash flow Q2, 2017
For cash rich Dangote Cement, engaging in a bidding war for PPC might just be a piece of cake.
DangCem had cash and cash equivalents of N104 billion ($290 million) at the end of Q2, 2017, and generated net cash from operations of N144 billion ($401 million) in the period (see Fig 2).
DangCem also has cash rich parent company Dangote Industries Limited (DIL), from which it can tap resources from to pursue the bid.
PPC has said it will consider any rival offers to the joint approach by Fairfax Financial Holdings Ltd. and domestic rival AfriSam Group Pty Ltd. and present them to shareholders in early October.
PPC’s current share price of 6.35 rand values the company at 10.12 billion rand ($792 million) and suggests investors expect a higher offer to emerge.
The Fairfax proposal would give the Canadian company a stake of more than 30 percent stake in the combined entity, said two of the people.
That stake would be worth $237 million based on today’s closing value.
The Public Investment Corp., the biggest shareholder in both PPC and AfriSam, would prefer a higher cash component of more than 6 rand a share, according to people familiar with the matter, who added that Fairfax hasn’t ruled out increasing its offer.
We estimate that the impact of acquiring PPC on DangCem would be largely positive as the firm has the firepower to conclude the deal due to its huge cash generating operations and low gearing levels.
Concerns remain though around margins for South African cement operators and the ability to turn around PPC, whose fully year 2016 earnings plunged by 96 percent to 7 cents per share from 107 cents in the earlier period.
Aliko Dangote, who has interests in sugar, flour and packaged food businesses as well as cement, is Africa’s richest man and has a net worth of $11.4 billion.