Relief as Afrimat walks away from R2.1bn coal deal
Building materials supplier opts not to acquire Australia-listed Universal Coal
Investors have welcomed a decision by building materials supplier Afrimat to walk away from the R2.1bn acquisition of Australia-listed Universal Coal.
Afrimat, which has a market capitalisation of R4.5bn, said in April it had made an offer for Universal Coal, which operates in SA. It offered a maximum price of A$0.40 (US27c) a share.
At the time, Afrimat CEO Andries van Heerden said the deal could make sense as SA – via power utility Eskom – was set to rely on coal-fired power stations for at least another 20 years.
“Following a thorough due diligence process and extensive consideration, Afrimat’s board and management has decided not to proceed with the acquisition given the size and nature of the transaction,” the company said in a statement on Wednesday.
Independent analyst Anthony Clark said the deal may have flopped because Universal Coal’s owners “were too bullish with their cash flow assumptions on the coal mines”.
If that was the case, the valuation would have been a stretch, Clark said.
Walking away from the deal was “a good move”, said Clark, who rates Afrimat shares a “buy” and says they are worth R39 apiece.
Afrimat’s shares were 4% up in early trade on Wednesday at R33.01.
Clark said that with the deal off the table, there was no need for a rights issue by Afrimat, “so that speculative dampener can be removed”.
“Iron ore is generating significant cash flow and I expect that by interim results to August, gearing will be in single digits with the company possible back in a net cash position by its February 2020 year end. Afrimat is in a healthy financial position to thus fund any new transaction that may occur post the Universal withdrawal,” Clark said.
Samantha Steyn, chief investment officer at Cannon Asset Managers, said the move to abandon the deal was a relief because a deal that size would have raised Afrimat’s risk profile.
“We are wary of large mergers and acquisitions – there is a great deal of research and many examples in the market that demonstrate that these often don’t work out as planned,” Steyn said.
A number of SA companies, particularly retailers, have stumbled since making large acquisitions. Woolworths, for instance, has lost favour in the market since paying more than R20bn for Australia’s David Jones, which has struggled amid a shift away from department-store shopping.
An announcement by Truworths International on Tuesday that its UK subsidiary, Office, may need to restructure its debt amid tough trading conditions highlighted the risks of foreign deals in particular, analysts said.
“Investors need to be sceptical of South African companies making offshore acquisitions,” said David Oberholzer, equity analyst at Nitrogen Fund Managers.
“Initially these acquisitions appear to add value, but this can be due to the fact that they are geared and provide a positive spread, however once the initial uplift is in the base, the organic growth of these businesses can be anaemic,” Oberholzer said.
“Despite Afrimat’s record as a great capital allocator, past acquisitions have been of a more reasonable size, and this proposed deal was by far the largest,” Steyn said.