Analysis: Lafarge Africa’s proposed N140 billion in rights issue


Nairametrics| Cement producer Lafarge Africa plans to raise equity through a rights issue later this year. The company says it wants to raise a whopping sum of N140 billion, which is currently about half its current shareholders funds.

Here is what we know about the offer:

  • About N140 billion will be raised and will be raised will be in form of a rights issue.
  • Lafarge is raising the money to pay down dollar debt borrowed from its parent Lafarge Holcim.
  • This means debt owed its parent company may be converted into equity.
  • Based on this, it is unlikely that any new cash will be injected into the company
  • The company will seek shareholders approval next month.
  •  A similar exercise was carried out by Guinness Nigeria and Diageo its parent company.

Why Rights Issue? 

  • 2016 was a difficult year for the cement company as a foreign exchange loss of N22 billion and finance cost of N15 billion swung the company’s result to a loss before tax of N22.8 billion.
  • A $493 million loan from parent company Holcim was converted into quasi-equity in June 2016. The loan was then assigned to Caricement BV, a related company of Lafarge.
  • The company placed the naira value of the loan at N139 billion in their 2016 FY annual report.
  • Under the terms of agreement, both the loan and the annual interest of 6% are repayable at any time within the discretion of Lafarge Wapco.
  • The loans were originally taken by Unicem a subsidiary of Lafarge, but transferred to Wapco’s books in 2016 upon its taking a majority stake in Unicem and the merger of Lafarge (Wapco’s parent) and Holcim (parent company of Unicem).
  • By embarking on a rights issue, Lafarge pays off the loans, thus no new cash will be brought in by Caricement.

Implication for current shareholders

  • At the proposed N140 billion capital raise, Lafarge Africa might have to issue about 3.2 billion new shares or 60% of current issued ordinary shares assuming a discounted share price of N45.
  • The stock currently trades at N49.6. Its YTD high is about N51
  • At our suggested issue price, Lafarge’s parent company, LafargeHolcim will be expected to contribute about N107 billion (60% of its current holdings of 3.978 billion units at N45).
  • Considering that this is expected to be a debt equity swap, Lafarge Holcim will not need to stump out that cash. Rather, N107 billion from their outstanding loan of N139 billion will simply be netted off.
  • The balance N40 billion will be contributed by other shareholders who take up the rights and then passed on to Lafarge Holcim.
  • For shareholders, whilst debt has effectively been repaid, a new more expensive capital in equity had been injected.
  • Shareholders will have to deal with smaller earnings per share and lower return on equity as we do not envisage any immediate pass through to profits from this deal.

Buy or sell

  • There could be a push for a buy on the anticipation that significant shareholders may be willing to prop up its share price. Lafarge is currently trading at a price earnings ratio 0f about 9x.
  • However, the long term outlook of the stock seems bleak as such any buy should be short term and flipped once target price is met.

 

What's your say?