Construction giants to cement the deal

The proposed merger between cement rivals AfriSam and PPC, announced this week, could mark Phuthuma Nhleko’s proper return to major deal making through his company Pembani.

This would come hot on the heels of his almost-completed buyout of Cyril Ramaphosa’s Shanduka group.

As former CEO of MTN, Nhleko was involved in clinching several deals, which served as the impetus for the telecoms giant’s expansion across Africa – and PPC, without a CEO and soon to be without a chairperson when Bheki Sibiya steps down at its AGM in January – is in the midst of an African expansion, for which it needs a strong leader.

It is also an opportunity for newly appointed Public Investment Corporation (PIC) boss Daniel Matjila to put in motion his plans to increase the funds allocated to developmental and African investments – as communicated in a recent interview with news service Bloomberg – to 10%.

On Wednesday, PPC issued a cautionary announcement saying it was considering the proposal from the Stephan Olivier-led group.

Nhleko first came to prominence as the CEO of telecommunications company MTN between 2002 and 2011, and cemented the company as an African powerhouse with a presence in 21 countries.

Nhleko then left MTN in 2011 to focus on Pembani, an investment company he co-founded, and soon after was involved in a deal that saw debt-laden AfriSam taken over by Pembani and the PIC.

AfriSam was previously a joint operation between Swiss building and aggregates multinational Holcim and local construction major Aveng. It sold an 85% stake to

a consortium led by an empowerment company called Bunker Hills Investments for R23?billion in 2007. Within the consortium, Bunker Hills ended up with 37% of AfriSam and the PIC with 20%.

But AfriSam’s debt burden became too heavy, particularly in the midst of the global economic crisis that hit the construction industry hard; and the company faced the possibility of defaulting on that debt.

At that point, Pembani approached Bunker Hills to take AfriSam’s shares off its hands, but it refused and so Nhleko tried another tack.

Pembani bought R16?billion worth of debt from AfriSam creditors CitiGroup, BlackRock Advisors and JPMorgan for R3.7?billion. In this way, Pembani, along with the PIC, began to convert the debt into equity, diluting Bunker Hills’ shareholding. This left Pembani with operational control of AfriSam and a 38% stake, and the PIC with 57%. But Pembani reduced its shareholding to 30.5% while the PIC now holds 66%.

A source close to the transaction said: “Pembani’s initially envisaged shareholding was 38% but this was reduced to 30.5% following a requirement for Pembani to also hold 30% of a PIK Note [debt instrument], which was held 100% by the PIC. As a result, the PIC increased to 66% shareholding and 70% holding of the PIK Note.”

According to the source, Pembani supports the proposed merger, and the deal had to go through its board, of which Nhleko is now executive chairman.

Pembani was also the company Deputy President Cyril Ramaphosa entrusted his investment company Shanduka to. The merged entity will have a gross value of more than R13.5?billion, according to Pembani and Shanduka.

Nhleko has proven, through his leadership at MTN, that he knows how to navigate the African market and often takes calculated risks that bring great rewards to shareholders.

AfriSam’s footprint extends into Botswana, Lesotho, Swaziland and Tanzania, but as it is unlisted, its financials are private and it is difficult to judge how it is doing in these markets. But PPC’s subsidiaries elsewhere on the continent are in need of substantial investments and are currently being funded by the South African parent.

At the recent release of its results for the year to September, PPC finance chief Tryphosa Ramano said the group had secured $412?million (R4.8?billion) for its expansion projects in Rwanda, Ethiopia, the Democratic Republic of Congo and Zimbabwe.

But with capital expenditure (capex) on three of these projects reaching R1.4?billion during the year and the group capex bill projected at about R3?billion for next year, this funding will not last too long.

This is where Matjila comes in – and as the guy now signing the PIC’s cheques, he must be relishing the opportunity.

The PIC welcomed the merger proposal, but would not add to its statement earlier this week that the merger would create a formidable cement player on the continent, contributing meaningfully to its developmental plans. This slots in nicely with Matjila’s plans.

Cabinet elevated Matjila to the top post on Thursday for a period of five years, effective December 1. He was formerly the PIC’s chief investment officer for eight years.

Matjila previously told Bloomberg he would like the share of the PIC’s investment portfolio currently allocated to developmental investments and other African countries to be increased to 10%.

The PIC had R1.6?trillion in assets by March 31. It has set up three fund investment panels to fast track developmental investments, and these panels approved R11.4?billion in unlisted investments – with R4.8?billion paid out by the time its 2013/14 annual report was published. The asset manager has a minimum budget of $500?million for developmental investments in Africa, and a further $500?million for private equity transactions on the continent.

But there has been apprehension about getting around the competition authorities. When asked if AfriSam was concerned about this, spokesperson Maxine Nel said the company was no longer commenting on the deal.

Lafarge Cement, another major player in the cement industry, also declined to comment on the competitive implications of the deal and whether it was concerned about the proposed merger. Apart from the creation of a huge cement company, the PIC shareholding in both companies might be a significant hurdle and could require that the PIC divest from one.

Recently, the competition commission approved an intermediate merger between cement producers Holcim and Lafarge Cement SA, which has a shareholding in AfriSam, with conditions aimed at preventing Holcim having joint shareholding in Lafarge and AfriSam.

Deputy competition commissioner Hardin Ratshisusu at the time said cross shareholdings between competitors, particularly in highly concentrated sectors, were a recipe for collusion.

This week, the commission said it did not have enough information to comment on the deal.

“As to the impact on the sector, it is a matter that requires an in-depth assessment of the effect of such a deal on competition in all affected markets,” said spokesperson Themba Mathebula.

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