Dangote Cement may be in for a bidding war as Canada’s Fairfax Africa investments has signaled its intentions to raise its bid offer for South Africa’s PPC Cement. PPC had rejected an earlier bid of $738 million from Fairfax, calling it low.
Dangote Cement, on Friday confirmed its interest in the deal after it issued a press release on the website of the Nigerian Stock Exchange. This move could likely put Dangote Cement on a path to a bidding war with other cement rivals, who may be interested in acquiring PPC.
Why PPC Cement is key for Dangote
Taking over the firm will give the acquiring company a foothold, not just in South Africa but in the larger southern region as a whole. Dangote Cement currently has presence in East & Southern Africa with presence in Tanzania, Zambia, Ethiopia and South Africa.`
Dangote Cement South Africa recorded a significant increase in revenues in 2016 psoting a revenue growth of 16% to N41.3 billion compared to N35.3 billion in 2015. The South African subsidiary also turned a profit in 2016 posting N2.1 billion profit compared to N483 million loss in 2015. Dangote Cement owns 64% of the local entity.
Dangote Cement is currently the largest cement producer in Africa with a production capacity of almost 46 million tonnes. PPC has a production capacity of 7 million tonnes per annum. PPC latest result reveal the company reported revenues of about 9.1 billion rands or N254 billion, gross profit came in at R2.282 billion, operating profit was recorded at R1.027 billion (N32 million), while profit for the year attributable to shareholders of PPC was R93 million. Furthermore, headline earnings per share was 7 cents per share.
A potential deal could therefore give Dangote Cement a domineering foothold in the Southern African Market keying into the strategy of Dangote to remain as the market leader in Cement production within Africa.
Sources close to Aliko Dangote reveal is core strategy is to corner the African cement market allowing his company to dominate a sector that is likely to attract demand for years to come as Africa prioritizes infrastructural development and housing for all. Some also explain that Aliko believes that he will attract little competition from foreign investors who may not be willing to splash billions of dollar in tough sector like Cement.
We however do not expect this to be very easy acquisition for Dangote Cement. Fairfax has a 11% holding in PPC, as well as a 60% holding in Afrisam, another cement company based in South Africa. Fairfax is also expected to improve its recent offer, which was rejected by PPC. Reports suggest the offer from AfriSam and Fairfax for PPC shares on Sept. 4 was valued at 5.75 rand but this has so far been rejected. PPC share price closed at about 6.4 rand per share on Friday.
While PPC has a market capitalization of $738 million, Dangote Cement has a capitalization of $10 billion. Dangote Industries Limited (DIL) recently sold about 1.2 billion shares of the company, thus providing free cash flow for an acquisition.
Nationalistic sentiments could be the decider
Though South Africa’s Public Investment Corporation (PIC) has a stake in Dangote Cement, the company may be unwilling to let the Nigerian company be the dominant player in the Southern Africa cement market. Dangote Cement last year shut down its Tanzanian plant, due to a failure of the government to fulfil tax exemptions it had promised.
In March this year, the company also faced hostility from the host community of its Ethiopian plant. The company closed at N205.80 on Friday’s trading session on the Nigerian Stock Exchange (NSE). PPC cement shares closed at 640 ZAR up 11.3% year to date.