The other big cement producer merger collapsed this week when PPC announced that it had terminated discussions with AfriSam. Details were scant due to a confidentiality agreement between the South African cement producers. However, the CEO of PPC, Darryll Castle, confirmed that neither party could agree the terms of the merger. PPC's shares rose by 5% on the news of the breakdown.
Financially the decision may have made sense. As an unlisted company AfriSam doesn't publish its financial results but PPC did report a revenue of US$742m in 2014. Comparing cement production capacity in South Africa gives PPC 4.75Mt/yr and Afrisam 3.50Mt/yr. Roughly this is a 58:42 split although this doesn't take into account both companies' aggregates, ready-mix concrete and other product concerns.
It's possible that disagreements over the value of the two companies caused the breakdown. At the time the merger was first proposed in December 2014 PPC was reeling from the resignation of its CEO Ketso Gordhan in September 2014. Some media commentators viewed the proposal as opportunistic on the part of AfriSam given all the internal problems PPC was coping with. Also, given that the combined companies would have held a 60% share of the market, it is likely that the Competition Commission of South Africa would have taken a keen interest.
The uneven ratio of sizes between the two companies considering merging is similar to the problems now facing Lafarge and Holcim. The European building materials companies started out trumpeting their merger of equals before Lafarge's relative poor financial performance and fluctuating currencies made a mockery of this parity. Once this became clear then major shareholders in Holcim started to question the merger.
Back to Africa, the question with PPC and AfriSam is whether they should have swallowed their differences in view of future growth. With Dangote expanding across the continent and Lafarge consolidating its local activity under the Lafarge Africa banner it seems like the time to merge resources and expand.
AfriSam has been saddled with debt since a buyout in 2007 when Holcim reduced its share from 85% to 15%. In 2011 it agreed to pay a penalty of US$16m, representing 3% of its 2010 cement annual turnover in the Southern African Customs Union, due to cartel activity. Then in 2013 investment holding company Pembani Group reduced AfriSam's debt for shares and a controlling say on its board. By contrast PPC has been expanding across Africa, in countries such as the Democratic Republic of Congo (DRC), Zimbabwe, Algeria and Mozambique, to boost foreign sales to 40% by 2017. The programme is anticipated to raise PPC's cement production capacity from 8Mt/yr to 12Mt/yr.
Domination at home in South Africa and firm plans for continental expansion suggest that this deal wasn't in PPC's interest, although its domestic cement sales have declined which may have also made the case for consolidation more tempting. Dangote's progress in west African must be both inspiring and troubling for South African cement producers.
