Italtile cracks tribunal’s nod for Ceramic merger
The Competition Tribunal has approved Italtile’s binding offer from July 2016 to buy up to a further 74.5% in Ceramic Industries, the tiles, sanitaryware and bathware manufacturer of which it already owns 21%.
The sale was approved on condition that Italtile employees may not gain access to any information on Ceramic relating to third-party customers.
“We are delighted this acquisition has finally been approved after a protracted 18-month process,” Italtile CEO Jan Potgieter said on Wednesday.
“We look forward to implementing the merger programme which will capitalise on opportunities that exist in the two businesses. We have confidence in the potential of the combined entity and the market, and will continue to commit investment to realise further growth.”
The merger comes less than a month after Italtile said trading conditions and consumer sentiment deteriorated in the year to June 2017 as a result of poor economic growth in SA. It said this had caused an industry-wide fall in sales, as margin pressure intensified.
The acquisition date will be October 2 2017. Ceramic’s South African operations comprise five tile factories, one sanitaryware factory and a bath factory. It also owns a tile factory in Australia. The company is Italtile’s primary supplier and also supplies others, such as Cashbuild, Massmart and Tiletoria.
“Waiting for the tribunal’s ruling on the Italtile-Ceramic [merger] has been like watching paint dry,” said Anthony Clark, an analyst at Vunani Securities.
“The merger, where Italtile is already a material shareholder and has legacy knowledge of the business, is a classic Harvard textbook vertical integration merger,” he said.
The single condition imposed by the tribunal would still allow Italtile to control the entire value chain from tile to floor. This would “trap margin along every step of the process”, said Clark.
“I expect material integration and margin benefits to accrue as the deal beds down and the hefty but manageable debt pile to be repaid … in a matter of just a few years.”
The Ceramic buyout would also help Italtile’s vision to expand, mainly in East Africa, said Clark.
Italitile’s margin, profit and market penetration were already sound across the low-end Top T brand, through the middle-end CTM market, to its dominance through Italtile top-end products, he said.