The merger between South Africa’s larger cement producers, PPC and AfriSam, is back on this week. PPC issued a statement advising its shareholders that the board of directors of both companies were about to enter formal talks to thrash out a potential deal. Issues such as the merger ratio, black economic empowerment and local competition concerns are all on the agenda.
The resumption of merger talks follows the cancellation of the previous round in mid-2015. No reason for the breakdown was publicly released but possible factors may have included the fallout at PPC from the resignation of its chief executive officer (CEO) Ketso Gordhan and competition concerns. Given the investigations by the South African Competition Commission from around 2008 to 2012 these may have been very real concerns. At this time the two companies held about a 60% share of the country’s cement production capacity.
Events have changed since then with the opening and ramp-up of Sephaku Cement’s cement plant at Aganang and its grinding plant at Delmas since late 2014. Today, PPC and AfriSam control just under 50% of the cement production capacity in South Africa and PPC’s current CEO Daryll Castle remains in post since early 2014. What a difference a year or so can make.
PPC moved its financial year end from September to March in 2016 making it hard to compare like with like. However, its revenue appears to have grown by 10% year-on-year to US$396m for the six months to 30 September 2016. Its earnings before interest, taxation, depreciation and amortisation (EBITDA), a measure of operating performance, fell by 7.5% to US$80m at the same time. Since then PPC notified markets with a trading statement saying that its sales volumes in South Africa had risen by 4% in the nine months to the end of December 2016 but that its prices had fallen by 4%. It also noted that its local cement sales volumes declined marginally when compared to the same quarter in the previous year, with the exception of the Western Cape region.
PPC also has various projects underway in sub-Saharan Africa, including plant builds in Democratic Republic of Congo (DRC) and Ethiopia. Of note to any potential merger with AfriSam are its plans to build a new 3000t/day production line at its Slurry plant in Lichtenburg. The project was reported 54% complete in early February 2017 with first clinker production scheduled for the first half of 2018. CBMI Construction, a subsidiary of China’s Sinoma, is the main contractor for the upgrade project. Once complete the new line will add about 1Mt/yr to the plant’s cement production capacity. One implication of this project is that it will push PPC and AfriSam’s market share over 50% that may have consequences with the local competition body.
For its part AfriSam appears to be suffering financial problems according to local press. The Public Investment Corporation (PIC), a government investment body, revealed in late 2016 that it had invested over US$100m in the cement producer since 2008. The PIC holds a controlling share of AfriSam with a 66% stake in the group. Other than this, solid facts about the state of AfriSam’s business are thin on the ground. However, competition in South Africa’s cement sector has certainly increased in recent years both within and without, from the import market.
As this column has said a few times merger and acquisitions seem to be the way to go for cement producers in weak markets. However, as annual results from Cementir and HeidelbergCement show this week, the initial boost from new asset and business purchases may not be so rosy when viewed in a pro-forma basis or when taking into account new units’ past performance. A lot here rides on these companies being able to take advantage of synergy effects and to make crucial savings. The big example of this in the global cement sector is LafargeHolcim. It will announce its financial results for 2016 on 2 March 2017. It also operates a cement plant in South Africa and the results may have implications for the PPC and AfriSam merger.
In other news, the European Union parliament has voted today, on 15 February 2017, to amend its Emissions Trading Scheme (ETS) in line with a proposal made by the European Commission. This is unlikely to impress the environmental lobby or users of secondary cementitious materials in cement production, amongst other parties. More on this topic next week.