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Capital Markets

Cement-maker Lafarge consolidates in challenge to Dangote

Lafarge consolidates its regional business to challenge Dangote Cement’s dominance of the market, which is growing amid industrialization, but analysts worry the company’s South African assets are overpriced.

Lichtenburg Works is Lafarge's flagship cement production site and is one of the largest and most technically advanced cement facilities in southern Africa. Copyright: Lafarge photo library/Ignus Gerber

Nigerian cement company Lafarge Wapco has won shareholder backing to consolidate its African businesses at the company’s annual meeting on July 9.

Lafarge Wapco, the main unit in Nigeria, which has a capacity of $4.5 million tonnes of cement, will take control of the company’s direct and indirect assets held by Lafarge in the rest of the region for $1.35 billion in cash and stock transactions.

Assets include the Ashaka Cement plant in northeast Nigeria, Atlas and Unicem plants in the southeast, and Lafarge South Africa.

Guillaume Roux-large
Through consolidating 
the business across Africa, we are able to create 
a strong platform for 
future growth and become more competitive

Guillaume Roux

After the transaction, the combined company will have access to 12 million metric tonnes of cement and will be renamed Lafarge Africa Plc. Lafarge Group will own 73% of the business and the new company will be the sixth largest by market capitalization listed on the Nigerian Stock Exchange.

“Through consolidating the business across Africa, we are able to create a strong platform for future growth and become more competitive,” says Guillaume Roux, country CEO of Lafarge in Nigeria.

“By 2017, we see production capacity rising from 12 million metric tonnes to 17 million metric tonnes with further developments. Through consolidation and expansion, we are creating value for our shareholders.”

He adds: “We saw tremendous appreciation in the company when we saw capacity for Lafarge Wapco rise from two million metric tonnes to 4.5 million metric tonnes a few years back and we are confident that we will replicate this.”

The aggressive growth of Lafarge has led some to believe the company will become a rival to Dangote Cement by 2017. Compared with Lafarge Africa’s consolidated cement production capacity of 12 million metric tonnes, Dangote Cement, the largest listed company in Nigeria, boasts nearly three times the amount, with 35 million metric tonnes.

Andy Gboka, African equity analyst, associate director at Exotix, says: “Market leader [Dangote] is still in a good position to weaken any competitive push from Lafarge Africa. If there is enough demand, both players will benefit, but should annual growth fall below 10% in a given year or any other market issue occur, Dangote will always do better than Lafarge,” citing the former’s size.

The consolidation of Lafarge’s regional unit has come at a price, with some analysts arguing the South African unit was overpriced at a cost of $200 million and 724,758,803 Wapco shares.

“The addition of the South African assets will definitely weigh negatively on consolidated returns, as those in Nigeria will always be well above South African levels,” says Gboka.

“The $200 million that Lafarge Wapco needs to pay Lafarge, on top of the issuance of Wapco shares, is, on my calculation, not that far from an excessive premium for the South African assets.”

Operating margins

As it stands, the South African business is made up of 50% cement on one side and 50% ready mix, aggregate products and fly ash on the other. This means that prospects to achieve operating margins above 20% to 23% are limited, according to Gboka.

“To achieve this, the company will need capex to change the business profile and boost returns,” he says. “This combined with the limited growth potential in the South African cement industry, which is growing around 3% to 5% in the medium to long term, doesn’t create much excitement.

“I believe the right valuation multiples are EV/ebitda at eight to nine times and not the 12 to 13 times based on the terms proposed in the transaction.”

Oyindamola Olanrewaju
Oyindamola Olanrewaju,
Renaissance Capital

Oyindamola Olanrewaju, part of the sub-Saharan materials research team at Renaissance Capital, shares similar concerns.

“From our discussions with clients, we note mixed views on the assets selected and the price proposed,” she says in a note published on the day of the annual meeting. “In particular, we note significant negativity on the inclusion of the South Africa business, from both strategic and pricing perspectives.

“The proposed pricing of the SA business outweighs its value to Wapco shareholders.”

However, Roux rebuffs these concerns. 

“Although there have been some concerns surrounding the South African part of the acquisition, South Africa remains the second-largest economy in the continent and there is huge potential for growth there, with only 250kg of cement per capita – far below the global average,” he says.

“And while Nigeria offers steady growth, and the business in South Africa offers stable cash flows, our business in South Africa is more developed in terms of our downstream cement business. We see this influencing our units in Nigeria, fast-tracking development there and creating extra value.”

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