Why the PPC, AfriSam tie-up is facing shareholder rebellion

10 October 2017

The proposed merger between SA’s largest cement producer PPC and its unlisted rival AfriSam might be scuppered for the second time as several shareholders have come out voicing their concerns against it.

Shareholders believe that the deal, which has the backing of Canada’s investment holding firm Fairfax Africa Investments, undermines PPC’s potential for future growth in SA and the rest of Africa.

Prudential Investment Managers, Value Capital Partners and Visio Capital Management are opposing the merger.

Prudential, which has a 14% shareholding, has expressed its concerns to the management of PPC and AfriSam, arguing that it sees more value in PPC being a standalone business.

Activist investment firm Value Capital Partners supported Prudential’s views in its opposition to the merger. 

The firm, which owns 5% of PPC, has put an intrinsic value of at least R10 to PPC shares based on its balance sheet after the rights issue and presence across Africa.

AfriSam needs PPC

Prudential’s house view is that the merger would benefit AfriSam more than PPC. “AfriSam needs to be recapitalised and the current shareholders of AfriSam appear unwilling to inject further capital,” said Wood.

AfriSam received bailouts from several shareholders in 2012 after facing a smothering R15 billion debt load. At the time, AfriSam’s recapitalisation included the Public Investment Corporation (PIC) investing R9.3 billion, Phembani injecting an undisclosed amount that scored it a 30% stake and Holcim Switzerland writing off R3.5 billion of its debt.

Visio Capital Management, which has a 7% stake in PPC, said “Visio wishes for PPC to walk away from this deal, to stop wasting valuable management time and company resources towards an uncertain and very likely messy outcome and to instead focus on its own operations and deal with its own challenges.”

Three shareholders holding more than 25% of PPC have opposed the merger, said PPC chairman Peter Nelson. This is a massive snag as the deal requires 75% of shareholder support for it to be successful. 

Shareholders have also taken umbrage with Fairfax’s R5.75/share, which is based on PPC’s earnings before interest, tax, depreciation, and amortisation of R2 billion for the year to March 2017.

Value Capital’s Sithole said Fairfax’s offer materially undervalues the company given its cash generation potential. “At an offer price of R5.75/share, we would be buyers, not sellers of the company, as the business is worth almost double that,” he said. As owners of PPC, we are not interested in the short-term share price levels and are happy to keep our business for the long-term value creation for shareholders.”

Said Prudential’s Wood: “Fairfax is offering PPC shareholders the opportunity to bank a short-term gain but in doing so, risk transferring significant value to the consortium comprising Fairfax, PIC and Phembani, who will end up controlling 55% of the combined entity.”

The PIC’s position

“The PIC has not been approached by the PPC board with any proposed offer for PPC shares. We will be in a position to express a view after we have been approached with a proposal and have studied the terms thereof,” said Deon Botha, the PIC’s head of corporate affairs.

The PIC also holds a majority stake of about 60% in AfriSam. Shareholders have questioned whose interest will the PIC serve with the merger given its shareholding in both PPC and AfriSam.

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