Ashaka MTO: A 'Tender' deal?


Thursday, January 15, 2015 13:35 PM / ARM Research

Summary of considerations
Following the acquisition of 58.61% equity interest in Ashaka Cement Plc by Lafarge Cement Wapco Nigeria Plc (now Lafarge Africa Plc) in September 2014, Lafarge Africa made a mandatory tender offer (MTO) for minority interest in line with the provisions of section 131 (1) (a) of the ISA.

Based on the MTO details, Lafarge Africa is to exchange 57 of its shares for 202 units of Ashaka – implying an exchange ratio of 0.28. In addition, a further consideration of N2 per share, ex tax, would be paid to shareholders that accept the MTO on or before the stated closing date of January 16, 2015[1].

In the event of dissenting shareholders, Lafarge Africa plans to call on its right to acquire such shares–as provided for in section 146 of the ISA–with due regard to the shareholders’ right to dissent and demand for the fair value of their shares. According to this section, this fair value estimate would be determined by the court through its appointed valuers.

However, Lafarge Africa can only call on the provisions of section 146 of the ISA only after acquiring at least 90% of the entire equity interest in Ashaka.

Implied pricing for Ashaka appears fair relative to market…
Evaluating from a market standpoint, on applying Lafarge Africa’s last market close value of N80 to the terms of the MTO, we arrive at an implied price of N22.57 for Ashaka. In order words, given the terms of the transaction and Wapco’s current market price, the deal values a share of Ashaka at N22.57. This new implied price is ~10% higher than Ashaka’s last closing price, indicating that the tender offer gives the investor more for an Ashaka share compared to market.


…and offer looks good on fundamental and technical grounds
Having already expressed our optimism on the Nigerian leg of the Lafarge Africa transaction, we are unperturbed by Lafarge Africa’s plan to increase its stake in Ashaka. To re-iterate our position the integration with Ashaka offers Lafarge access to the less competitive North Eastern market, where prices are ~10% higher than in the South West.

Nevertheless, Ashaka still remains attractive on a standalone basis, the aforementioned as well as its improving energy efficiency (via ongoing coal substitution) should continue to support earnings.

Fully incorporating the foregoing, our current FVE of N29.95 for Ashaka, is currently at 46% premium to last market price, whereas with FVE of N126.07, Lafarge Africa clearly boasts a higher upside of 58% relative to its last market price. Furthermore, on a relative valuation basis, Lafarge Africa, with PE of 7.77, is cheaper than Ashaka with related PE of 8.09.

Thus, it makes more sense to substitute units of Ashaka for Lafarge Africa, given the latter’s relatively higher upside, and on this basis the tender offer looks attractive.

To examine this relative upside argument from another angle, much of Ashaka’s upside is dependent on expansion plans being concluded in a timely manner and WAPCO/Lafarge Africa is critical to achieving this. Whilst from the perspective of the latter’s shareholders there can be indifference to a go/no-go decision on expansion as the entity is already combined, minority Ashaka shareholders are unlikely to be able to realize this value on a standalone basis compared to WAPCO’s potential upside which has more probability of materializing.

MTO offers better value than market
Whilst our positive investment view on the swap of Ashaka for WAPCO shares can be executed in one of two ways: selling Ashaka at market and using the proceeds to acquire Lafarge Africa shares or accepting the MTO, analytical results clearly favours the latter.

To buttress, our derived exchange ratio of 0.24, based on our valuations, is at a discount of 14% to that implied by the consideration on the MTO documents, reinforcing the overall reasonableness of the offer.

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