EDITORIAL: Prudential Investment Managers and Value Capital Partners have to make PPC amends
Duo put up a big fight against takeover bids for pressured cement maker three years ago
If anyone is under the most pressure to ensure PPC’s survival, it should be asset manager Prudential Investment Managers and Value Capital Partners, an investment house best known for using its stakes to push for changes in boards and company strategies.
The duo put up a big fight against multiple takeover bids for the cement maker three years ago, saying the offers fundamentally undervalued the company.
One such offer was from rival Afrisam. It teamed up with a Canadian firm, Fairfax, to submit a cash and share tie-up proposal that valued PPC at more than R9bn. The industrial merits of the deal were cogent: it would have created an entity with more than 60% market share in SA, one that would have stood a better chance of navigating challenges posed by the Covid-19 pandemic.
It is true that the offer — alongside several others including one from Nigeria’s Dangote Cement and Ireland’s CRH — had a whiff of opportunism as PPC had just been thrown into a liquidity crunch after a ratings downgrade triggered an early bond redemption.
Furthermore, Value Capital Partners, cofounded by former private equity director Sam Sithole, and Prudential figured the offer failed to factor in the future earnings potential of PPC’s expanding African businesses. In fact, Prudential had forecast that operating profit and cash flow would nearly double in three years.
Since they torpedoed the transaction, PPC shares have slumped more than 90%, valuing it at just less than R1bn
None of that materialised. Investors should, therefore, be forgiven for feeling robbed of an easy payout when the duo sank the cash and share tie-up. The stock portion of the deal would have ensured they would not have totally missed out on the predicted upside for PPC.
Since they torpedoed the transaction, PPC shares have slumped more than 90%, valuing it at just less than R1bn. For a company that was worth R10bn just three years ago, it’s a remarkable destruction of value.
Last week’s annual results offer a glimpse of what investors were fleeing from. The company swung into a R2.4bn annual loss after writing down the value of assets by R3bn to reflect the gloomy economic outlook in the wake of the pandemic, which found the company already in a terrible shape. PPC was far from living up to expectations of strong operational performance used to justify the rejection of Afrisam’s proposal.
If anything, it is PPC’s cross-border business that was once seen as its strongest investment proposition that could put shareholders on the hook for cash for the second time in four years.
CEO Roland van Wijnen, at the helm for about a year, is considering selling shares to existing investors worth R750m-R1.25bn in the second quarter of 2021 as part of the latest survival plan to fix its lopsided capital structure.
The company, which has also put its lime business on the chopping block, is labouring under R5.8bn in borrowings loaded up in expansion elsewhere on the continent to offset weak growth at home.
PPC’s business in the Democratic Republic of the Congo (DRC), in which it owns about 69%, is not generating enough money to service its $150m (R2.4bn) debt, forcing its parent to plug the gap. Given that DRC lenders can go after its SA assets if the business defaults, PPC has had little choice but to advance more than R900m to the operation since 2017.
The latest survival plan, led by Value Capital Partners chair Antony Ball, includes diluting its 100% holding in its international business — which houses the DRC, Rwanda, Zimbabwe and Ethiopia operations — with another fundraising, which would be used partly to pay off its share liabilities in the DRC debt-restructuring process.
Overhauling the company’s capital structure, especially breaking up the link between its SA assets and the borrowings of its DRC division, is crucial if PPC is to play a part in what is expected to be an infrastructure spending-led economic recovery at home.
Investors can only hope Value Capital Partners and Prudential have what it takes to make up for denying them what, with hindsight, looks like an easy payout.
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