Goddy Egene writes on the proposed merger between Cement Company of Northern Nigeria and Obu Cement Company and the value it will create for shareholders and economy at large
In bid to consolidate its growth strategy and contribution to the cement industry, Cement Company of Northern Nigeria (CCNN), a member of the BUA Group, recently announced its plans to merge with Obu Cement Company Plc, which owned by Chairman of CCNN, Alhaji Abdulsamad Rabiu and Alhaji Isiaka Rabiu.
Obu Cement operates a six-million metric tonnes per annum (mtpa) cement production plant situated in Okpella, Edo State. The plant is configured to operate on multiple fuel sources including gas and liquid pour fuel oil. It is also equipped with a 50 megawatts (MW) captive gas power plant which will supply the plant’s non-kiln operations. Its main source of gas is a 30km gas pipeline built by Obu Cement from the Ajaokuta gas line to Okpella.
Prior to now, CCNN had last year completed a similar business combination with Kalambaina Cement Company, a larger and newer Sokoto-based cement company.
With CCNN’s pre-merger 500,000 mtpa capacity and Kalambaina Cement Company, -‘s 1.5 million metric tonnes per annum capacity, the emergent CCNN had 2.0 million mtpa capacity and that strengthened dominance as North-West Nigeria’s largest cement company and giving the company the volume for aggressive expansion in Nigeria and beyond.
Now CCNN board and management recently notified the Nigerian Stock Exchange (NSE) of its plan to merger with Obu Cement. In the notification, CCNN said the merger will be effected by way of a Scheme of Arrangement, pursuant to Section 539 of the Companies and Allied Matters Act, 1990.
The scheme will involve the transfer of all CCNN’s assets, liabilities and undertakings including employees, real properties and intellectual property rights to Obu Cement. In consideration for the transfer, CCNN shareholders will receive shares in Obu Cement and the company will be dissolved without being wound up. Obu Cement will remain the surviving entity and will be listed on the NSE.
Benefits of merger
In his letter to shareholders of CCNN, chairman of the company, Abdulsamad Rabiu said the decision to merge, is primarily motivated by the board’s goal of ensuring that the company is well positioned to grow and expand in the Nigerian cement industry.
“The merger with Obu Cement will create an entity with increased production capacity. We are of the opinion that the proposed merger will create a platform where significant synergies can be obtained for the benefit of our shareholders, employees, customers, distributors, suppliers and the broader economy,” he said.
Rabiu explained that the merger will increase the production capacity of the enlarged company to 8.0 million mtpa.
“It is anticipated that in addition to meeting the demand from customers in our core regions in the country, the enlarged company would be positioned to distribute its products in new geographical markets, creating the potential for additional shareholder value creation,” he said.
In terms of operational efficiencies, Rabiu noted that merger would provide opportunities for significant cost savings and improved operational efficiencies by streamlining operations and optimising the use of combined resources.
On economies of scale, Rabiu said: “The merger will provide a platform where the enlarged company benefits from economies of scale in procurement, distribution and manufacturing of the products offered to our customers. We expect the benefits accruing from greater economies of scale to accrue to many stakeholders.”
According to him, CCNN shareholders will become shareholders of a larger and highly profitable entity, stressing that synergies created as a result of the merger would create additional value for shareholders.
For instance, CCNN posted a revenue of N31.72 billion for the year ended December 31, 2018, while Obu Cement recorded a revenue of N87.29 billion. However, the enlarged company would record a revenue of N119 billion post merger. CCNN posted a profit after tax (PAT) of N5.731 billion in 2018, while Obu Cement recorded a PAT of N58.6 billion but the enlarged company post merger will end with PAT of N64.3 billion.
“Besides, the enlarged company will create a platform for further investment that will have a positive impact on the communities where the operations of the companies are present as well as for the economy as a whole,” the foremost industrialist declared.
He said this consolidation would mark the culmination of the first phase of the BUA mid-term strategic plan for its cement businesses, which currently include four cement plants spread across Obu Cement Company and the CCNN.
“A new $450million Sokoto Kalambaina II Plant is scheduled to come on stream in the second half of 2020 alongside another 48MW power plant to complement the existing assets and take advantage of a growing cement market in Northern Nigeria and the West African region. This consolidation will cement BUA’s position as the second largest cement producer in Nigeria whilst also positioning it to take advantage of the combined synergies to effectively serve Northern and Southern Nigeria based on the strategic locations of these plants – as well as a sizeable export market,” he said.
Rabiu said they intended to continue creating value for the benefit of shareholders of the consolidated company by maintaining their focus on outperforming the Nigerian cement industry across key indices through a laserlike commitment to excellent products and service delivery, operational efficiency as well as maintaining leadership position in their home markets.
Analysts’ assessment
Assessing the merger, analysts at Cordros Capital Limited said they understood that a total of 13.14 billion shares will be issued to the scheme holders, valued at N460.02 billion.
“This cascades to a price of N35.00 per-share, 113.4 per cent and 34.5 per cent premiums to current market price and our target price, respectively. Although, still behind Lafarge from the viewpoint of installed capacity, the combined entity will now have installed capacity of 8.0 mtpa split across Obu Cement (6.0mtpa), Kalambaina (1.5mtpa), and CCNN (0.5mtpa). In our last discussion with management, a new 3MT capacity is set to be launched in 2021, ensuring the company overtakes Lafarge as the second-largest cement producer in Nigeria,” they said.
According to the analysts, given the relatively young average age of three years, Obu Cement plants are efficient, and as such,” the largest gains we foresee will be: cost savings and economies of scale, given its size. Though configured to run on multiple fuel sources, Obu Cement’s plants runs on gas, mainly sourced from its 30km gas pipeline from Ajaokuta to Okpella.”
The analysts added beyond the foregoing, the enlarged company looks set to benefit from tax holidays on both the Kalambaina and Okpella plants.
Robust nine months performance
CCNN recently raised investors’ hopes for bountiful harvest at the end of the year after posting improved nine months results ended September 30, 2019. CCNN recorded a revenue of N42.5 billion in 2019, up from N19.57 billion in the corresponding period of 2018, while PAT rose by 118.5 per cent from N4.0 billion in 2018 to N8.76 billion in 2019.
Analysing the results, analysts at Greenwich Trust Limited, said CCNN recorded further impressive results as the consolidation of its merger with Kalambiana Cement Company continues to materialise.
According to them, on a 9-month (9M) basis, the company recorded a 117.22 per cent growth in topline to achieve N42.51 billion up from N19.57 billion achieved in corresponding period of 2018. They added that likewise, a growth of 38.45 per cent was recorded on a quarterly basis in which the company made N10.37 Billion in revenue from N7.49 Billion in Q3’2018.
“However, the company’s efficiency level deteriorated as cost of sale spiked higher than revenue growth. The cost of sales increased by 119.66 per cent and 45.18 per cent on 9M and quarterly bases to N24.04 billion from N10.94 billion and N6.28 billion from N4.32 billion respectively. This is sequel to the high cost associated with energy and the rising depreciation cost due expansion of plants following the recent merger,” Greenwich said.
The analysts explained that in spite of this, the earnings, before interest, depreciation and amortization (EBITDA) reported higher by 146.5 per cent as it increased from N6.22 billion in 9M’2018 to N16.33 billion in 9M’2019. Similarly, the company recorded a growth of 120.48 per cent in EBITDA on a quarterly basis as it increased to N5.58 billion in Q3’2019 from N2.53 billion.
They noted that profitability equally improved as profit before tax (PBT) and PAT achieved growth of 103.95 per cent and 118.53 per cent in 9M’2019 to record N11.68 billion and N8.76 billion from N5.73 billion and N4.01 billion respectively.
“However, PBT on a quarterly basis declined by 4.65 per cent to settle at N1.97 billion from N2.07 billion in 9M’2018 while PAT recorded growth of 5.16 per cent to reach N1.48 billion from N1.41 billion. The company’s balance sheet position continues to improves in 9M’2019 as the value of its property, plant and machinery stood at N221.72 billion, growing by 0.98 per cent from N219.57 billion. Total asset recorded 2.14 per cent growth in 9M’2019 to reach N355.18 billion from N347.75 billion in corresponding period of 2018. However, the debt position declined by 55.14 per cent to N240 million from N530 million. Therefore, net asset settled at N337 billion up 1.05 per cent from N333.49 billion 9M’2018,” they said.
Greenwich said the last year’s capacity addition by CCNN from 500 mtpa to 2.0mtpa into the cement industry continued to stiffen the competitive environment.
“Particularly the market advantage it enjoyed in the North Western region of the country in terms of proximity positions the company to continue to impress in terms of top-line and bottom line. However, the price tension weigh in very much on sales revenues as cement companies engage in discount and promotional sales to drive sales volume. In the past months, CCNN awarded a total of N6.15 billion in discount, a 250.2 per cent hike from the 9M’ 2018 figure of N1.75 billion.
