‘Cement tie-up does not make business sense’


Updated Mon, 15 Dec 2014 16:10:36 GMT

A MERGING of South Africa’s two largest cement producers — PPC and Afrisam — has been under discussion at the PPC board since 2010, and is believed to have played a role in heightening tensions that eventually confirmed Ketso Gordhan’s exit from the group.

A tie-up between the largest (PPC) and second-largest (Afrisam) cement producers would create an entity with just under 60% of the South African market and raise considerable competition concern.

Commenting after this week’s announcement that PPC had received a proposal from unlisted rival Afrisam, former PPC CEO Paul Stuiver said that some members of the PPC board had wanted to do this deal since 2010. Mr Stuiver said at the time it was decided that a merger produced no value for PPC shareholders, but some board members continued to push for it.

“Because the two companies are so similar there is little synergy. It would just make PPC almost twice as big as it is in the South African market, which is oversupplied and likely to remain oversupplied for the next five to six years,” said Mr Stuiver. He said that in 2010, Afrisam’s hefty debt burden, then about R19bn, would have swamped the merged entity.

“It made far more sense for PPC to focus on growing its business in Africa rather than loading up with more capacity in an oversupplied South African market. And it still does.”

Mr Stuiver, who supported Mr Gordhan’s re-appointment as CEO, would not comment on reports that current PPC chairman Bheki Sibiya was one of the directors pushing the merger.

The deal was announced just days after a special shareholders meeting had been scheduled to vote on an overhaul of the PPC board. The meeting was cancelled, and a “compromise” reached when it became apparent that the Public Investment Corporation (PIC) and Lazard Asset Management would not support the resolution needed to change the board.

The PIC, which has poured several billions into Afrisam since the failed BEE buyout in 2007 and holds 66% of the company and 12.57% of PPC, is keen to put the two companies together and create a national cement champ.

Fidelis Madavo, PIC’s acting chief investment officer, said this week: “The PIC believes that Afrisam is now a well-run and significant South Africa cement producer.

“We think a potential merger between PPC and Afrisam would create a formidable cement player on the continent that will contribute meaningfully to South Africa and the continent’s developmental plans.”

It also said there could be “significant synergies and value-unlock” from such a deal.

One leading competition lawyer said it was extremely difficult to see how the competition authorities could approve the creation of a national cement champion, even assuming the government gave its backing.

“There’s a very thin line between a national champion and a dominant producer that charges excessive prices,” said the lawyer, noting the current difficulties government and the competition authorities are having with Sasol and ArcelorMittal over alleged “excessive” pricing of crucial industrial products.

Sasol and Arcelor Mittal (formerly Iscor) were set up and run by the government before being privatised in the late eighties.

This week, a spokesman for Economic Development Minister Ebrahim Patel said it remained to be seen what the benefits of a large cement company with a substantial government shareholding might be.

He referred to the “likely impact on prices to the market as a whole, as well as the state’s infrastructure projects and on employment in the companies concerned”.

In the past, both PPC and Afrisam have been the subject of Competition Commission enquiries into cartel activity in the cement industry.

The PPC board issued a statement saying it was considering the proposal and if implemented it “may have a material impact on the price of the company’s shares”.

Mr Sibiya said: “Competition Commission, valuation and synergies will be the major determinants of whether the discussions succeed or not.”