Merging for Value Creation

Goddy Egene writes that the merger between Chemical and Allied Products and Portland Paints and Products Nigeria Plc is expected to create value for all stakeholders

When the Boards of Directors of Chemical and Allied Products (CAP) Plc and Portland Paints and Products Nigeria (PPPN) Plc last year announced the decision to merge their respective businesses, discerning stakeholders knew it was a very strategic decision that would unlock potential in both firms and create value in the near term.
The companies had explained that CAP would emerge as the resultant entity at the end of the merger process.

According to the companies, their respective boards strongly believe that the proposed merger, which provides a unique opportunity to change the Nigerian paints and coatings landscape, would be attractive and value accretive to shareholders of both companies.

They noted that the decision to pursue the merger is driven by the strategic objectives of the boards to drive growth and expansion within the Nigerian and African markets.

“CAP and PPPN play in distinct segments, and the enlarged CAP Plc would have a broader portfolio covering the top-end/premium decorative segment, the mid-market decorative segments as well as the industrial segment (in particular marine and protective coatings).

“We believe that will provide our customers access to a broader product portfolio and a wider range of value options to meet their needs. The combination of CAP and PPPN will create a formidable paints and coatings company that will be strategically positioned across segments as a result of its combined brand portfolio.

They explained that the merger will be executed by way of a Scheme of Merger in accordance with Section 711 of the Companies and Allied Matters Act, 2020 and other applicable laws, rules and regulations.

It will involve the transfer of all PPPN’s assets, liabilities and business undertakings including real property and intellectual property rights to CAP Plc.

In consideration for the transfer, CAP offered shareholders of PPPN a choice to receive N2.90 cash every PPPN share held or one new ordinary share of CAP credited as fully-paid up for every eight PPPN shares held.

Commenting on the merger, Managing Director of CAP, David Wright, said: “The decision to pursue the proposed merger, is driven by the board’s strategic plan to aggressively grow within the Nigerian and African markets. “We believe that the proposed merger presents a unique opportunity that will benefit all stakeholders, from shareholders to customers as well as the broader economy.

“I am excited by the prospect of an enlarged company with a broader decorative paint portfolio covering the premium, mid-market and affordable segments and the inclusion of marine and protective coatings, all of which will benefit our customers and shareholders.”

According to him, CAP would become the largest player in the Nigerian paints market by market share which is estimated at 14.9 per cent and this is due to the fact that the Portland Paints’ Sandtex brand provides access to the large, untapped, high volume “mid-market and value for money” segment of the decorative paint market.

“The enlarged company will have a broader decorative paint portfolio covering premium, mid-market and value for money segments to the benefit of our customers.

“Furthermore, CAP is also expected to benefit from enhanced distribution capabilities in addition to economies of scale and operational efficiencies. CAP has 73 stores across 31 states, whilst PPPN has 14 stores across nine states. The combined entity will have 88 stores across 32 states.

“We are quite confident that PPPN is the right partner for CAP Plc and that the merger would create value for all stakeholders of the merging entities,” he added.

Also speaking, MD/CEO of PPPN, Mrs. Bolarin Okunowo, said: “In recent months, the board and management of PPPN have evaluated various strategic options with a view to positioning our company to capture emerging growth opportunities.

“CAP business is complementary to ours, and both companies will be better able to serve our respective customers by coming together. I believe the combination of PPPN and CAP Plc will yield significant benefits for all of our stakeholders.”

According to her, PPPN holds a 35-year record of manufacturing and selling industrial, marine, decorative and protective paints for the construction and oil and gas industries in Nigeria, pointing out that the company’s flagship, Sandtex, is renowned for its exceptional quality for residential commercial and industrial buildings.

She said the merger would create opportunities for shareholders and stakeholders on both sides as the two companies have complementary synergies that would lead to greater returns.

Okunowo noted that the business combination would lead to an enlarged and a formidable paints and coatings company with larger brand portfolio including Dulux, Sandtex, Caplux and Hempel with the broadest distribution channels and retail footprint in Nigeria.

Given the value proposition in the merger, the shareholders two months ago approved the merger at separates court-ordered meeting (COM) in Lagos. CAP Plc is a consistent dividend payer and shareholders are optimistic that the enlarged company would not only maintain the regular dividend payment but would also increase the payout as the merger yield the expected fruits.

For the year ended December 30, 2020, CAP Plc recommended a dividend of 210 kobo per share. Just like many companies that were affected by the COVID-19 pandemic last year, CAP Plc had its own share of the negative impact. However, compared to losses posted by some companies, CAP Plc ended 2020 with lower profit as a result of the headwinds.

The company ended the year with a revenue of N8.7 billion, indicating an increase of 3.9 per cent compared to N8.4 billion recorded in 2019. Selling and marketing expenses fell 3.5 per cent from N584 million to N564 million, while administrative expenses rose 19.7 per cent to N1.636 billion.

Gross profit declined 5.5 per cent to N3.755 billion from N3.973 billion decline due to input cost pressures on account of currency devaluation and supply chain disruptions. Earnings interest and tax(EBIT) fell from N2.120 billion to N1.645 billion due to the decline in gross profit and investments in talent to strengthen the work force and drive profitable growth.

Profit before tax stood at N1.896 billion in 2020, compared to N2.546 billion in 2019, while profit after tax (PAT) printed at N1.289 billion as against N1.742 billion in 2019.

Explaining the performance, Wright, said: “CAP Plc recorded modest top-line growth last year despite the COVID-19 lockdown in the second quarter of 2020 and protests in the fourth quarter of 2020, effectively losing seven weeks of sales. We are encouraged by the growth in revenue which has been solely driven by underlying volume growth in line with our strategy. Alongside the rest of the world, we experienced supply chain disruptions which impacted our raw material sourcing and resulted in input costs pressures. We have embarked on initiatives focused on mitigating these disruptions and expect to see positive results in 2021.”

Although CAP Plc was said to have experienced supply chain disruptions which impacted its raw material sourcing and resulted in input costs pressures, the company has put strategies in place to mitigate these disruptions.

Stakeholders are optimistic that CAP Plc would be a leader in the Nigerian paints industry that has brighter future as efforts are being made to bridge the infrastructural gap and narrow the housing deficit.