PPC an unlikely candidate for a takeover battle — yet it has several suitors
Fairfax, LafargeHolcim, CRH, Titan Cement, Dangote — all are circling SA’s largest cement maker and, despite its past struggles, potential investors see a bright future
Pull quote: Grabbing their attention is PPC’s extensive footprint in Africa, which has the potential to develop infrastructure at a blistering pace in coming decades.
SA’s biggest cement maker, PPC, is an unlikely candidate for a takeover battle.
The supplier of building materials reported a loss in its last fiscal year, doesn’t have a permanent CEO and its home market has just come out of recession. Still, potential bidders are circling.
PPC has received one formal offer from Canadian insurer Fairfax Financial Holdings, which has pledged to buy a stake on condition it agrees to merge with a local rival. Other companies monitoring the situation include Switzerland’s LafargeHolcim, the world’s biggest cement maker; Dublin-based CRH; and Titan Cement of Greece, people familiar with the matter have said. Nigeria’s Dangote Cement is also watching closely.
While the potential buyers have all declined to comment on the current status of their interest, PPC has given Fairfax until November 22 to post its offer to shareholders. That will allow other bidders time to do due diligence on the company — which has a market value of R10.8bn ($768m) — and decide whether to proceed with a counteroffer, PPC said on October 3.
Grabbing their attention is PPC’s extensive footprint in Africa, which has the potential to develop infrastructure at a blistering pace in coming decades. The 125-year-old company has supplied cement for major building projects in several African countries and has expanded with new plants in Ethiopia, Zimbabwe and the Democratic Republic of Congo (DRC). Its takeover would come amid an intensifying push for consolidation in the global cement industry that has seen two deals unveiled in the last month.
"PPC has a good portfolio of assets," UBS analyst Kwame Antwi said. "Cement consumption on the continent is lower than most parts of the world, and Africa is also likely to experience some of the most rapid urbanisation rates."
Cement use in Africa is less than 50kg per person, with some countries as low as 30kg, according to London-based Bloomberg Intelligence analyst Sonia Baldeira. That compares with China’s 1,737kg per person and Europe’s 230kg. "You can see the huge potential that Africa represents in the next 50 years," she said.
Notwithstanding future prospects, PPC has struggled in recent years. In 2016, the supplier was forced to raise R4bn ($291m) in a rights issue after S&P Global Ratings cut its debt to junk. The company is well capitalised for the foreseeable future and doesn’t need to raise cash from shareholders a second time, chairperson Peter Nelson said in August, though the business continues to pay close attention to debt levels.
In response to their weak balance sheets, slowing demand in SA and expensive expansion projects, PPC and AfriSam Group, SA’s number two cement maker, have been in on-off talks for a tie up for the past three years. Their combination has the support of the powerful Public Investment Corporation, the state-owned, biggest shareholder in both companies, which is looking to create a South African industry champion. Fairfax’s offer includes a pledge to re-capitalise debt-laden AfriSam on condition PPC agrees to a merger.
PPC has supplied cement for major African projects including Harare International Airport in Zimbabwe and the Congolese Trade Centre in the Congo capital, Kinshasa, while Ethiopia is in the midst of a construction boom that’s included the building of an urban railway in Addis Ababa.
Yet ramping up PPC’s operations in the DRC has proved problematic due to lower government spending amid uncertainty surrounding the timing of delayed presidential elections. Cement prices in SA have also been depressed by cheap imports from neighbouring Angola, PPC said in a presentation to investors.
Nigerian competitor Dangote made an indicative proposal to buy PPC last month, before abandoning the plan two weeks later. Yet CEO Onne van der Weijde said last week that the Lagos-based firm retains an interest "at the right price".
PPC shares traded at R6.78 a share at the close on Wednesday. This compares with Fairfax’s offer for R2bn of stock at R5.75 each, indicating that investors are anticipating a higher bid. Rowan Goeller, a Johannesburg-based analyst at Macquarie, values PPC at R7 a share.
"The share price got too cheap and was trading significantly below replacement value of the underlying assets," UBS’s Kwame said. "Such a scenario will always attract the attention of bargain hunters."
The market in SA needs consolidation, Aliko Dangote, Africa’s richest person and the owner of Dangote Cement, said in an interview with Bloomberg TV last month. His company, which already operates in SA through Sephaku Cement, has expanded rapidly outside of Nigeria in recent years, including into Ethiopia and Tanzania.
Major cement makers outside Africa have been in consolidation mode since the creation, two years ago, of LafargeHolcim from Swiss and French rivals. Last month, HeidelbergCement agreed to acquire Italian assets from Cementir Holding and CRH agreed to take over Ash Grove Cement of the US for $3.5bn.
PPC’s potential bidders are "spotting a unique opportunity to jump into SA and other huge potential markets, such as Ethiopia," said Bloomberg Intelligence’s Baldeira.