Universal Coal price tag deters Afrimat
Construction materials supplier walks away from deal over extra cost to acquire full operational control
Afrimat’s decision to walk away from a R2.1bn deal through which it would have bought Australia-listed Universal Coal, will not slow down the listed materials supplier’s acquisitions drive, CEO Andries van Heerden says.
Afrimat, which has a market capitalisation of R4.8bn, pulled out of the deal because it would have been “significantly more expensive” if the building materials firm wanted full operational control, Van Heerden said on Wednesday.
The company would not ditch its strategy of pursuing acquisitive growth, he said.
“Afrimat is known to be successful at doing acquisitions. As part of our business development strategy we are continuously evaluating potential acquisitions and the best opportunities are executed,” he said.
In April the company made a bid for Universal, a multimine coal producer that counts Eskom among its customers. Afrimat made a non-binding offer to buy Universal Coal for A$0.40 a share.
Universal Coal’s thermal coal mines include Kangala and the New Clydesdale Colliery, both in Mpumalanga. The two mines have separate off-take agreements with Eskom until 2023.
Afrimat said that following a thorough due diligence, it decided against the acquisition “given the size and nature of the transaction”.
Van Heerden said the due diligence revealed that the transaction would become significantly more expensive than initially anticipated if Afrimat were to require full operational control.
“The return on this investment, although still good, was not as good as other opportunities available to Afrimat,” he said.
The deal would have added to Afrimat’s commodities portfolio following its foray into bulk commodities when it bought the Demaneng iron ore mine in the Northern Cape in 2017. The bulk commodities division supplies iron ore to local and international markets.
Independent analyst Anthony Clark said the deal might have flopped because Universal Coal’s owners “were too bullish with their cash flow assumptions on the coal mines”. If that is the case, the valuation would have been a stretch, he said.
Walking away from the deal is “a good move”, said Clark, who rates Afrimat shares a “buy” and said they are worth R39 apiece.
Clark said that with the deal off the table, there is 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.
But Van Heerden said the company agreed with Universal Coal’s cash flow assumptions. “Their work was thorough and reliable. It was these cash flows that we used in our evaluation models,” he said.
The company is not concerned about debt accumulation due to the now-aborted transaction, he said.
“Afrimat has an extremely strong balance sheet and strong support from its shareholders. Funding a good project of this size would not be a problem.”
Afrimat shares were up 5.67% to R33.55 on Wednesday, the company’s biggest one-day increase since June 14.