PPC and AfriSam merger faces competition authority hurdles

What stands between the creation of a mega cement maker that would be able to compete internationally is not only for the deal to pass muster among shareholders but also one that meets approval of the competition authorities.

At this point, the merger between PPC and AfriSam is not a dead cert, as competition authorities will likely weigh up the merits of concentration in the domestic cement market, as well as  the promotion of healthy competition.

PPC CEO Darryll Castle admits that “the competition regulators will play a major role in this transaction.” Already some market watchers envisage that the deal will be complex and could end up in a drawn-out process, taking as long as a year.

On Monday, PPC announced that it has revived merger talks with its competitor AfriSam, after valuation rows in 2014 resulted in both companies ditching their ambitions to combine operations. The value of the proposed merger is not known, with Castle saying it’s “still in early stages”.

Equity analyst at Cape-based Electus Fund Managers Mish-al Emeran says given the lack of financial details about the merger, it’s not clear which shareholder group will benefit. “PPC is the dominant player in the cement market, and post its [R4 billion] rights issue, it has a balance sheet that can withstand the current tough trading conditions, placing it in a stronger position relative to peers, which implies that AfriSam is more in need of a merger,” Emeran tells Moneyweb.

However, Castle rejects the assertion that the timing of the merger is opportunistic, capitalising on a time when AfriSam is struggling. Just like other cement makers, AfriSam is battling with government’s low infrastructure spend, tough competition, low cement prices and the dumping of cheap cement from Asia.

The merged entity is expected to be financially stronger and operationally efficient, allowing PPC the ability to invest in growth opportunities.

Castle says the local cement market is in “need of consolidation” as increased competition over the past two years, which has seen six new entrants including Sephaku Cement and Mamba Cement, has resulted in more cement volumes being pushed into the market.  “Consolidation is inevitable and the timing [of the merger] is right. Hopefully, we can be architects of consolidation rather than that happening around us.”

Difficult market conditions in PPC and AfriSam’s home market continue unabated, which has prompted both companies to ramp up investments further into the African continent – with AfriSam owning a cement plant in Tanzania while PPC has plants in Zimbabwe, Rwanda, the Democratic Republic of Congo and Ethiopia.

After implementing turnaround initiatives including cutting costs to be competitive and overcoming infighting between the company’s former CEO Ketso Gordhan and the board, PPC may now be in a position to consolidate the market.

Electus Fund Managers has raised concerns about the merger including the potential sale of PPC assets as part of the Competition Commission’s stringent conditions and that management’s time could be taken up by the merger at the risk of losing focus on its operations.

“How will PPC’s African projects be valued, which are all still in the process of ramping-up, with uncertainty regarding sustainable profitability levels? A PPC group level merger could risk diluting the upside potential from its African projects,” says Emeran.

The merged entity will be empowered, as AfriSam’s Black Economic Empowerment (BEE) investors Phembani Group and PPC’s empowerment investors will own a share of the merged entity.

Among the shareholders that will vote on the merger is the Public Investment Corporation (PIC), which is an AfriSam shareholder through its 65% stake, but also a shareholder in PPC, owning more than 15% of the cement maker. The PIC hadn’t responded to Moneyweb’s request for comment by the time of publishing.

PPC shares finished 2.8% higher to R7.20 on Monday.

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