The M&A between Dangote Cement and BCC - Matters Arising

Proshare

Friday, September 10,  2010 6.02PM / Proshare Research

Is it okay to promote/pitch the Dangote/BCC merger and listing as a good panacea to the leverage banks has on the NSE? Yes, it would appear so – without sentiments.

That is – unless such sentiments are devoid of questions about the process, communication management, and the perception related thereto or arising therefrom. Let us take a look at some five issues ahead of the analysis that is to come from the scheme of merger:

First, in managing the news communication, information had filtered out weeks back about the alleged granting of waivers on fees, given the amount involved. This had led to more interest from the market, long aware of discussions on the planned merger before the breakdown in corporate governance ethos at the NSE. The eventual newspaper expose therefore, of factual internal decisions from the SEC, and ahead of the NSE’s decision was considered a fait accompli. This in itself suggested that this was a deal that needed to go through, presented as an indication of market confidence return and without any investment justification or discussion on the investment rationale or benefit to the average investor.

Since no formal business combination document was publicly released before the NSE approval, it would be safe to assume that the newspaper reports were no more than corporate press releases, rather than market news.

Second, We recall that one of the problems with this deal with the then NSE management was the contentious issue of compliance with the market rule that no one person holds more than 75% of a publicly listed company (i.e. NASCON) and the information that only 4% was offered to shareholders of BCC Plc. This matter requires a public clarification, including a confirmation of consent from the shareholders of BCC Plc.

It is instructive that we clarify that the percentage which BCC Plc shareholders will own is dependent on how many shares the new company is issuing. BCC Plc shareholders that do not want to be part of the merger should/could be bought out – as is standard practice.

Third, it would appear that the decision to approve the merger was not contained in the Agenda and final resolutions at the last AGM of BCC Plc – the listed company on the bourse. We are to assume that this must have been obtained at an extra-ordinary general meeting held before the documents were presented to Sec and the NSE, as part of what the regulators would have had to review.

It would appear that we do not have the type of situation experienced with Unipetrol Plc and Agip Plc, both quoted firms – but more of the situation in Zenon Oil’s attempted takeover of AP Plc with us. In this latter incident, the shareholders of AP Plc were consulted at an extra-ordinary general meeting held at Ibadan and their resolution forwarded to the SEC who rejected the deal and remains the reason why the AP/Zenon merger never took place.

Yet as we can see from the petitions making the rounds from insiders, both companies are being run as one. This might prove an instructive parallel in the days ahead as the shareholders role in assenting to such a deal gains traction. How did the SEC/NSE approve the deal without the shareholders consent given its public interest mandate?

The scheme of merger (court ordered document) has now been released and sent out to shareholders.

Further to the SEC/NSE approval, and preparatory to the listing of the new company, shareholders of BCC and Dangote Cement will now hold separate court-ordered meetings on September 28, 2010 in Kano to endorse the scheme of the arrangement. While the meeting of shareholders of BCC will hold at 11.00 am, that of Dangote Cement would hold at 10.00 am. Specifically, 15.494 billion units of the expanded company would be listed at N135 per share – a record high for a listing by introduction in the annals of the exchange

Fourth, it is important to the market that a clarification is provided on the status of the new company and if the other Dangote cement operations in other countries will form part of the new Dangote Cement Plc. It is instructive to note that the Dangote Cement operations extends to existing entities in Zambia, Senegal, Benin, Ghana and South Africa which are reported to be viable operations, albeit with lower annual production outputs.

Fifth, Perhaps more important to the practice of M&A in our capital markets is the need to bed the conflict of interest possibility that appears to exist in the transaction – based on communications so far.

It would appear that the financial advisor representing the unlisted Dangote Cement Limited on the one hand and the listed BCC Plc on the other hand is the same entity – Afrinvest Limited.

It is curious that the advisers on the buying side equally appear on the selling side of the transaction – with all the implications on transparency, pricing, and the ‘who is working for whom’ question. Was a special approval sought and granted by the SEC?

Sixth, the market could not ignore the timing impact of this decision, four weeks after the SEC acted on a petition by the promoter of the companies merging, to take over the NSE – having his merger plans now approved with dispatch. It is a curious co-incidence but since we do not live in a world devoid of co-incidences, we have to assume that nothing untoward is/was at play.

The notion that the merger, as explained below, could effectively make the promoter potentially responsible for more than a third of the market capitalisation however raises questions that impacts on the demutualisation agenda – a subject for another day.

The total market cap of the banking sector as 6th September is N2.371 trillion out of a total market cap of approx. N5.901 trillion (minus the 2nd tier which contributes N4.155bn) – if the total Dangote company market capitalisation before the merger is considered i.e. Dangote Flour N85.150bn, Dangote Sugar N196.680bn, BCC N246.913bn, NASCON – N16.161bn; we have a total of N0.595 trillion - already 10% of the total market share. BCC’s and Dangote Cement had revenues last year of around N33.35bn ($230m) and N188.50bn ($1.3bn) respectively.

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