CAP Vs PPP Merger: Working Towards A Fairy Tale Marriage and Investor Dividends

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Saturday, March 06, 2021, / 08:00 PM / By Adaeze Nwachukwu and Chioma Echebiri, Proshare Research   /Header Image Credit: EcoGraphics


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CAP Plc saw a dip in its corporate earnings in 2020 as it stumbled into the jaws of slow economic growth and a ravaging global health pandemic. COVID-19 caused a pull-back in construction sector spending between Q1 and Q3 2020 resulting in a marginal rise in revenue but a pre-tax fall in profit by a quarter of the previous year's 2019 numbers. Gross profit got snipped by 5.5% of the 2019 figure while the paint maker's cost of sales leaped by over a tenth from N4.45bn in 2019 to N4.98bn in 2020.

 

Despite these developments, CAP Plc's board decided on a brazen move to push the business forward through an unexpected acquisition move. The company acquired the assets and liabilities of one of its rivals, Portland Paints Plc. The move left analysts working hard to figure out the strategic value of the acquisition.  

 

The key highlights of the most recent financial performance of the two companies have been worked out in some rough form below; they show that CAP Plc modestly improved in earnings but got hit between the eyes to lower profits as the COVID-19 pandemic spread black paint over the efforts of the UAC Plc subsidiary to keep its head above troubled operating waters.

 

Portland paint had no less a fortune as it equally struggled to turn a profit and grow sales. The two companies before the marriage had interesting separate fortunes. Nevertheless, there were no prenup agreements and so CAP Plc would have to take PPP as it is with its warts and all.

 

Fit for A Marriage -A Look at the Bride (PPP) and the Groom (CAP Plc)


The Groom- CAP PLC FY2020 Unaudited Results


Key Highlights

  • Revenue rose by +3.89% year-on-year (Y-o-Y) from N8.41bn in 2019 to N8.74bn in 2020.
  • Profit before tax declined by -25.53% Y-o-Y from N2.55bn in 2019 to N1.89bn in 2020
  • Gross profit tumbled Y-o-Y by -5.49%, from N3.97bn in 2019 to N3.75bn in 2020
  • Cost of sales rose by +12.28% from N4.45bn in 2019 to N4.98bn in 2020
  • Finance cost increased significantly in 2020 by +50.40%, from N869,000 in 2019 to N1.31m in 2020
  • Selling and marketing expenses declined marginally by -3.47% Y-o-Y from N584.34m in 2019 to N563.94m in 2020.
  • Basic and diluted earnings per share declined by -26.10% Y-o-Y from 249kobo in 2019 to 184k in 2020

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Share Price and Volume Movement -A Dance with Uncertainty

Chemical and Allied Products Plc's (CAP Plc's) share price movement for 2020 was notable. The impact of COVID-19 was ominous. The company's share price slumped by -20.00% during the year with its lowest price recorded in July. There was an uptick towards the tail end of the year, but this was well below pre-COVID-19 numbers. Year-to-date (YTD), the paint maker's share price has dropped -5.0% as of February 19, 2021.

 

Traded volume grew by +7.91% in 2020, with April recording the lowest traded volume at the peak of the pandemic. August 2020 saw the highest traded stock volume closing the year with strong trading. In 2021, the traded volume of shares tumbled by -94.29% as of 19 February 2021 (see chart 1).

 

Chart 1: CAP Plc Share Price Movement and Volume Traded

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Source: NSE, Proshare Research

 

Profitability- A Mountain Needing A Climb

The paint manufacturer's revenue growth has been unsteady as shown by the graph represented below. In 2020 revenue increased marginally by +3.89% Y-o-Y, from N8.41bn in 2019 to N8.74bn in 2020. The highest percentage growth in the company's revenue was posted in 2018 with a growth of +233.95% Y-o-Y while 2017 saw the highest percentage company revenue decline of -66.29% Y-o-Y.

 

In US dollar terms, revenue for the period fell by -16.31% which was in contrast with the company's performance in local naira terms, suggesting that the company's revenue growth masked the impact of foreign exchange translation costs. From US$27.40m in 2019 to US$22.93m in 2020, this was a result of the devaluation of the domestic currency during the period. The translation of the currency was done using the CBN's official rate at the different periods (see chart 2).

 

Chart 2: CAP Plc Revenue 2015 - 2020 (N'bn)

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Source: CAP Plc Financial Statement, Proshare Research

 

Profit before tax (PBT) declined by -25.53% in 2020 which was the highest percentage decline recorded by the company in the last six years. From N2.55bn in 2019 to N1.89bn in 2020. The decline in PBT for 2020 was caused majorly by a -41.09% Y-o-Y decline in net finance income. The highest percentage CAP PBT growth of +19.07% was recorded in 2018.

 

In US dollar terms, PBT fell more severely by -40.00%, from $8.29m in 2019 to $4.98m in 2020 (see chart 3).

 

Chart 3: CAP Plc Profit Before Tax 2015 - 2020 (N'bn)

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Source: CAP Plc Financial Statement, Proshare Research

 

Liquidity Ratio-All About the Cash

The overall liquidity position of the company for 2020 increased to 73.58% from 65.75% in 2019. The increase in liquidity ratio was major driven by +304.96% Y-o-Y growth in prepayment, also cash and cash equivalents grew Y-o-Y by +34.69%.

 

The highest liquidity ratio of the company during the period under review was in 2020 while 2016 recorded the lowest liquidity ratio of 54.75% (see chart 4).

 

Total assets grew by +27.01% Y-o-Y from N6.76bn in 2019 to N8.59bn in 2020. Converting total assets figures to US dollar terms, total assets grew by +2.33%, from $22.03m in 2019 to $22.54m in 2020.

 

Chart 4: CAP Plc Liquidity Ratio 2015 - 2020

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Source: CAP Plc Financial Statement, Proshare Research

 

Activity Ratio- Painting True Colours

The current ratio of CAP plc during the period under review has been steady although below the ideal current ratio for a manufacturing company. The current ratio for 2020 was 1.68 which was higher than 1.44 in 2019. The increase in the current ratio was pushed mainly by the +31.73% growth in current assets which outstripped the +13.18% growth in current liabilities.

 

2019 recorded the lowest current ratio of 1.44 while 2016 recorded the highest current ratio of the company during the period under review (see chart 5).

 

Chart 5: CAP Plc Current Ratio 2015 - 2020

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Source: CAP Plc Financial Statement, Proshare Research

 

The unaudited result of the paint manufacturer for 2020 reveals quick ratio improved, from 1.18 in 2019 to 1.47 in 2020. A quick ratio less than 1 indicates that the company does not have enough ready assets excluding inventories to cover current liabilities which is not the case for CAP Plc.

 

Inventories for the period declined by -9.49% from N1.05bn in 2019 to N950.46m in 2020 (see chart 6).

 

Chart 6: CAP Plc Quick Ratio 2015 - 2020

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Source: CAP Plc Financial Statement, Proshare Research

 

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Working Capital-Sweating the Mullah

The growth in working capital has not been steady over the past few years. Working capital increased significantly by +73.71% in 2020 from N1.79bn in 2019 to N3.12. growth in working capital for the period was on the back of +31.73% growth in current assets (see chart 7).

 

Chart 7: CAP Plc Working Capital 2015 - 2020 (N'bn)

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Source: CAP Plc Financial Statement, Proshare Research

 

Total equity grew significantly in 2020, it grew by +51.12% which is the highest percentage growth recorded during the period under review. From N2.52bn in 2019 to N3.81bn in 2020. 2019 had the highest percentage decline of -10.23% during the period under review.

 

There was no debt-to-equity ratio for the period as there has not been any record of debt for the past three (3) years-both short-term and long-dated borrowings.

 

Translating to US dollar terms, the growth in total equity for the period was lower than its growth in Naira terms. Total equity grew Y-o-Y by +21.75% from $8.22m in 2019 to $10.0m in 2020 (see chart 8).

 

Chart 8: CAP Plc Total Equity 2015 - 2020 (N'bn)

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Source: CAP Plc Financial Statement, Proshare Research

 

The FY2020 unaudited results released by the manufacturing Company reveals the impact of the uncertainties that dominated the macroeconomic environment in 2020. The local manufacturing sector in which the company is a player was heavily impacted by the advent of the COVID-19 pandemic. Global and domestic supply shortfalls, lockdowns, and restrictions that accompanied the pandemic had its effect on the earnings especially its PBT.

 

However, on the flip side, the latest results have also shown that the Company carried out its operations without debt as there are no records of debt in the result bringing its leverage ratio to zero.

 

The Bride- PPP Nigeria PLC FY2020 Unaudited Results

 

Key Highlights

  • Revenue declined by -38.43% year-on-year (Y-o-Y) from N1.99bn in 9months 2019 to N1.23bn in 2020.
  • Profit before tax declined significantly by -175.48% Y-o-Y from N141.19m in 9months 2019 to a loss position of N106.58m in 9months 2020.
  • Gross profit down Y-o-Y by -45.43%, from N706.22m in 9months 2019 to N385.35m in 9months 2020
  • Cost of sales fell by -34.59% from N1.29bn in 9months 2019 to N843.35m in 9months 2020
  • Net finance cost declined significantly in 9months 2020 by -166.18%, from N5.98m in 9months 2019 to a loss position of N3.96m in 9months 2020.
  • Selling and distribution expenses declined by -31.03% Y-o-Y from N226.43m in 9months 2019 to N156.17m in 9months 2020.
  • Basic earnings per share declined significantly by -225.0% Y-o-Y from 12kobo in 9months 2019 to a loss position of 15k in 9months 2020.

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Share Price and Volume Traded-Feeling High

Portland Paints and Product (PPP) Nigeria Plc's share price movement was flat for most of the trading session in 2020, some months even recorded zero activity. The share price increased by +10.31% at the end of the year, with the price flat for seven months, October 2020 recorded the highest share price of the company. However, for YTD 2021, the share price has improved more, increasing by +32.11% as of 19th February 2021.

 

The volume of shares traded had the same trend with the share price movement. The volume of shares traded increased significantly by over +5000% in 2020 with October 2020 recording the highest volume of shares traded while June 2020 had the lowest volume. The YTD performance of the volume of shares traded increased by +348.01% as of 19 February 2021 (see chart 9).

 

Chart 9: PPP Plc Share Price Movement and Volume Traded as of 19th Feb 2021

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Source: NSE, Proshare Research

 

Profitability-No Hope for the Impoverished

The growth of revenue for PPP Nigeria Plc has a downward trend, harsh macroeconomic environment in 2020 also attributed to the decline its 2020 earnings. The 9months 2020 results show the revenue of the Company declined significantly by -38.43% Y-o-Y, from N1.99bn in 9months 2019 to N1.23bn in 9months 2020.

 

In US dollar terms, revenue declined more significantly by -50.40% from $6.5m in 9months 2019 to $3.22m in 9months 2020, reflecting the devaluation of the Naira.

 

Revenue for FY2020 was forecast by Proshare's TheAnalyst, the revenue of the paint company was expected to decline Y-o-Y by -38.43% from N2.61bn in 2019 to N1.61bn in 2020* (see chart 10).

 

Chart 10: PPP Plc Revenue 2016 - 2020* (N’bn)

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2020*: TheAnalyst forecast

Source: PPP Nigeria Plc Financial Statement, Proshare Research

 

PBT declined significantly in 9months 2020, from a profit position recorded in the previous year of the same period to a loss position. For 9months 2020, PBT declined Y-o-Y by -175.48%, from N127.19m in 9months 2019 to a loss of N106.58m in 9months 2020.

 

Gross profit for the period declined by -45.43% Y-o-Y, however, the cost of sales declined Y-o-Y by -34.59% from N1.29bn in 9months 2019 to N843.35m in 9months 2020.

 

Converting to US dollar terms, PBT declined by -160.80% Y-o-Y from $460,050 in 9months 2019 to a loss of $279,730 in 9months 2020.

 

PBT forecast by Proshare's TheAnalyst reveals Profit before tax expected to decline by -175.48% for FY2020 from N141.19m in 2019 to a loss position of N96.01m (see chart 11).

 

Chart 11: PPP Plc Profit Before Tax 2016 - 2020* (N'm)

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2020*: TheAnalyst forecast

Source: PPP Nigeria Plc Financial Statement, Proshare Research

 

Liquidity Ratio-Easing the Squeeze

Portland Paint's liquidity ratio increased from 17.32% in 9months 2019 to 22.43% for 9months 2020. This was majorly driven by a +17.63% Y-o-Y increase in liquid assets.

 

Total assets declined Y-o-Y -9.19%, from N2.19bn in 9months 2019 to N1.99bn in 9months 2020 as a result of a possible sell-off of fixed assets (see chart 12).

 

Chart 12: PPP Plc Liquidity Ratio 2016 - 2020

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Source: PPP Nigeria Plc Financial Statement, Proshare Research


Activity Ratio- Dragging Debt Down

The current ratio of the company went up between 9 months 2019 and 9 months 2020. The in 9 months 2020 current ratio rose from 2.87 in 9months 2019 to 4.40 which was the highest current ratio recorded by the company in the last six years. The rise was because of a +6.14% rise in current assets as against a -30.76% reduction in current liabilities (see chart 13).

 

For manufacturing companies, current ratios higher than 2 sticks a question mark over how efficiently they use up assets and their ability to draw supplier credit in the process of extending their receivable days or the number of days they must pay up their supplier debts.

 

Chart 13: PPP Plc Current Ratio 2016 - 2020

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Source: PPP Nigeria Plc Financial Statement, Proshare Research

 

The acid-test ratio (also known as the Quick ratio) of the paint producer rose in 9months 2020 as against the 9months of 2019, showing an improved liquidity position after adjusting for inventories. The recent result showed that the company's quick ratio rose from 1.48 in 9months 2019 to 2.50 in 9months 2020 as inventories slid down.

 

The company's highest 9month quick ratio was posted in 2020 as against its lowest quick ratio which was posted in 2016 (see chart 14).

 

 

Chart 14: PPP Plc Acid-Test Ratio 2016 - 2020

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Source: PPP Nigeria Plc Financial Statement, Proshare Research



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Working Capital- A Question of Heavy Lifting

The increase in working capital was majorly driven by a +6.14% increase in current assets while current liabilities fell by -30.76% Y-o-Y. Working capital increased Y-o-Y by +25.88%, from N1.08bn in 9months 2019 to N1.36bn in 9months 2020 (see chart 15).

 

Chart 15: PPP Plc Working Capital 2016 - 2020 (N'bn)

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Source: PPP Nigeria Plc Financial Statement, Proshare Research

 

Total Equity-Running on A Treadmill

The 9months unaudited accounts show that total shareholders' funds dipped Y-o-Y by -7.94%, from N1.59bn in 9months 2019 to N1.47bn in 9months 2020. The decline in total equity was caused by a -17.61% Y-o-Y drop in retained earnings.

 

In 2016, the company posted its highest percentage growth in total equity of +98.94% while 9months 2020 recorded the highest percentage decline in equity.

 

The debt-to-equity (leverage) ratio for the first 9months of 2020 was 7.50%, stock analysts considered this to be relatively low  , while the company had no known or published records of debt in the previous year 9 months 2019.

 

In US dollar terms, total equity fell by -25.84% from $5.19m in 9months 2019 to $3.85m in 9months 2020.

 

Proshare's TheAnalyst forecast, suggests that the company's total equity would fall by -7.94% for FY2020 (see chart 16).

 

Chart 16: PPP Plc Total Equity 2016 - 2020 (N'bn)

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Source: PPP Nigeria Plc Financial Statement, Proshare Research

 

 

The Market -CAP, PPP, and Technical Bobbles


PPP Nigeria Plc vs NSE ASI

The Nigerian Stock Exchange All Share Index (NSE ASI) tracks the weighted average of all companies listed on the NSE. This index most times tracks how companies on the exchange respond to the health of the economy.

 

PPP Nigeria Plc share price and the NSE ASI index showed a similar trend in 2020, responding to the harsh macroeconomic conditions caused by the COVID-19 pandemic. However, towards the end of 2020, there was a steady rebound in the NSE ASI while the rebound in the share price of PPP Plc was short-lived.

 

The NSE ASI closed the year 2020 positive with a YTD performance of +50.03% while PPP Plc closed the year negative with a YTD performance of -5.38%.

 

In the new year 2021 a reverse trend is shaping up, the NSE ASI has fallen by -1.17% as of 26 February 2021 while the stock price of PPP Plc has risen by +32.11% as of 24 February 2021 (see chart 17). The trend is understandable as merger situations typically result in acquisition candidates seeing their prices go up while the acquirer's price falls. The logic? Well, investors tend to believe that acquirers overpay for their targets and the targets themselves are overvalued so investors punish the acquirer and reward the acquiree.

 

Chart 17: PPP Nigeria Plc Share Price vs NSE ASI Movement

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Portland Share price: as of 24 February 2021

NSE ASI: as of 26 February 2021

Source: NSE, Proshare Research

 

PPP Nigeria Plc vs NSE Industries

The NSE Industrial index tracks the most capitalized and liquid companies in the industrial sector. Portland Paints and Products Nigeria Plc is also included in the NSE Industrial index.

 

The index mirrors the NSE ASI, reflecting the volatility that came with 2020. In 2020, the NSE Industrial index grew sharply by +90.81% while PPP Nigeria Plc declined by -5.38% as stated earlier.

 

The year-to-date performance of the NSE Industrial index declined by -7.51% as of 26 February 2021 while PPP Nigeria Plc increased by +32.11% as of 24 February 2021 (see chart 18).

 

Chart 18: PPP Nigeria Plc Share Price vs NSE Industries Index Movement

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Portland Share price: as of 24 February 2021

NSE ASI: as of 26 February 2021

Source: NSE, Proshare Research

 

CAP Plc vs NSE ASI

In 2020, CAP Plc's share price started a decline which was steady for most of the trading session in the year. However, towards the end of the year, the price of the stock picked up but not to pre-COVID-19 levels. CAP Plc stock price ended the year negative, closing at -16.67%. NSE ASI started its bullish trend in July, this was just after the lockdowns in Nigeria, and business activities started to reopen. The bullish trend was maintained throughout the year and closed significantly high.

 

For YTD performance, both the ASI and share price of the paint manufacturer closed negative. NSE ASI closed at -1.17% as of 26 February 2021, while CAP Plc dipped by -5.0% as of 26 February 2021 (see chart 19).

 

Chart 19: CAP Plc Share Price vs NSE ASI Movement

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CAP PL & ASI data as of 26 February 2021

Source: NSE, Proshare Research

 

CAP Plc vs NSE Industries

CAP Plc is also listed on the NSE Industries, its share price movement did not reflect the trend of the NSE Industrial index. CAP Plc closed the year 2020 negative, while NSE Industries closed significantly higher. YTD performance both the NSE Industrial Index and CAP Plc closed negative (see chart 20).

 

Chart 20: CAP Plc Share Price vs NSE Industrial Index Movement

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CAP PL & ASI data as of 26 February 2021

Source: NSE, Proshare Research

 

CAP Plc & PPP Nigeria Plc Share Price Movement

PPP Nigeria Plc and CAP Plc had different trends in their share price movement in 2020 and YTD performance. The share price for CAP Plc was choppier and had a bearish performance in 2020 which has continued in 2021. While for PPP Nigeria Plc, its share price movement was more stable for most of its trading session in 2020, activity picked up for the price towards the tail-end of 2020.

 

Both CAP Plc and PPP Nigeria Plc closed negative, with CAP Plc dipping more. For YTD 2021, PPP Nigeria Plc share price has rebounded closing at a +32.11% increase while CAP Plc share has not gotten to pre COVID-19 levels (see chart 21).

 

Chart 20: CAP Plc vs PPP Nigeria Plc Share Price Movement

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Portland Share price: as of 24 February 2021

CAP Plc: as of 26 February 2021

Source: NSE, Proshare Research

 

Mergers in Nigeria; The seasons of Corporate Marriages

Mergers have had a somewhat rich history in Nigeria, especially in the banking sector. The Federal Competition and Consumer Protection Act delineates the scope of mergers for its purposes as including situations wherein: one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking through the purchase or lease of the shares, assets, or an interest of the other undertaking, the amalgamation or other combination with the other combination, or establishment of a joint venture.

 

The prevalence of merger activity in the banking sector can be traced to the Central Bank of Nigeria's (CBN's) banking reforms which saw 89 local banks merge with one another. Some of these mergers involved the merger of Access Bank and Intercontinental Bank in 2012, Ecobank Transnational Incorporated's acquisition of Oceanic Bank, Stanbic and IBTC Banks' merger in 2007, and Access Bank's merger with Diamond Bank in 2019, which led to an increase in the volume of the bank's total assets from an estimated N4.95trn in 2018 to N7.12trn in 2019. Other successful mergers include that of Obu Cement with the Cement Company of Northern Nigeria (CCNN) in 2020 to form what is now BUA Cement, Chi Ltd.'s merger with carbonated drink heavyweight Coca Cola in 2019, as well as the merger of Ardova Plc with Forte Oil Plc to form Ardova Plc, although this led to a decrease in the size of total assets from N61.19bn in 2018 to N47.02bn in 2019 (see illustration 1 & 2 below).

 

Illustration 1: Valuation of Successful Mergers of Companies Listed on the NSE

 

 

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Illustration 2: Timeline of Mergers and Acquisition in Nigeria

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Legalese: A Dip into Nigeria's Merger Laws

Mergers in Nigeria are governed by various laws which may be classified as either general or sector specific. Meaning that while there are legislations that apply to mergers across various sectors (such as the Investments and Securities Act (ISA)), others apply to mergers only in a particular sector, e.g., the Bank and other Financial Institutions Act (BOFIA) which would apply to mergers between companies in the banking sector. As regards the merger between the Chemical and Allied Products Plc and Portland Paints, the laws which apply are the ISA, CAMA, Securities and Exchange Commission (SEC) Rules, and the Federal Competition and Consumer Protection (FCCP) Act.

 

Eyes on the Acts

The Investments and Securities Act (ISA)

The Act defines a 'merger' as 'an amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertakings or part of the undertakings of one or more companies or one or more bodies corporate' under Section 119 (1). Section 118 of the Act provides that every merger, acquisition, and business combination shall be subject first to the review and approval of the Securities and Exchange Commission. Mergers are classified under Section 120 (2) as either small, intermediate, or large. The proposed merger between Chemical and Allied Product Plc and Portland Paints is large because its value is roughly N 20bn, a value that surpasses N 5,000,000,000, the upper threshold set by the Act. The procedure for this sort of merger differs from the others.

 

Section 123 (1) provides that a party to an intermediate or large merger is to notify the Commission of the merger in the prescribed manner and form. The parties are subsequently to give notice to a registered trade union or the employees or their representatives of the employees concerned if no registered trade unions exist. Under Section 126, the Commission shall after receiving notice of the merger, refer the notice to the court and within 40 days after the notice is given, forward to the Court a statement on whether or not the merger is prohibited, approved, or approved subject to some conditions.

 

When the Commission seeks to sanction a large merger, it initially determines whether it is capable of stifling competition if implemented and if doing so will be in the public interest. After making this initial determination, the Commission can go on to grant approval in principle to the merger and subsequently direct the merging parties to apply to the court for separate shareholder meetings. The purpose of these meetings is to obtain shareholder approval for the merger. 121 (5) states that if at least three-quarter majority of the shareholders either by themselves or via proxy assent to the merger, it will be referred afterward to the Commission for its approval. Section 122 (6) provides that if the SEC approves the merger, the companies which intend to merge shall then apply to the court to sanction it after which the merger will be binding on the parties involved.

 

 The court may by that order or a subsequent one instruct that the undertaking and profits or liabilities of the transferor company be transferred to the transferee company, dissolution but not winding up of the transferor company, a continuation of all legal proceedings in which the transferor is involved against the transferee, allotment of any shares, and other such incidental consequential and supplemental matters which are necessary for the effective implementation of the merger or reconstruction.

 

Hence, the procedure for a large merger approval under the ISA involves approval by the Securities and Exchange Commission grant of an approval-in-principle, Shareholder approval, and lastly, Approval by the court.

 

Companies and Allied Matters Act (CAMA)

The provisions relating to mergers under CAMA are not as extensive in comparison to the other laws as it touches only on matters relating to shareholder assent.

 

Section 711 of the Companies and Allied Matters Act empowers the Court to order for a meeting where either of the parties to a compromise, arrangement, or restructuring tenders an application in summary to it for such. Section 711 (2) provides further that the majority representing at least three-quarters of the shareholders have to agree to the scheme and once this is reached, the Court will sanction the Scheme. After the Court sanctions the merger scheme, it may under Section 711 (3) order for the transfer of the assets and/or liabilities to the transferee company, the continuation of any proceedings against the transferor company to the transferee, dissolution without winding up of the transferor company, among others. These provisions are closely related to those listed under the Investments and Securities Act and the Securities and Exchange Commission Regulations.

 

Federal Competition and Consumer Protection Act

The Federal Competition and Consumer Protection Act and the Merger Review Regulations contain various stipulations on large mergers in Nigeria. Section 13 of the Regulations states that application must be made to the Federal Competition and Consumer Protection Commission ('the Commission') before a large merger may be approved for implementation. Section 13 (2) provides that the Phase One Review entails a party to the merger applying to the Commission and it, in turn, determine if it is likely to substantially prevent or lessen competition. Within five days of the receipt of the application, the Commission is bound to publish notice of the merger.

 

This phase is to be completed within sixty days for a large merger, and a small merger, within twenty days, as stated under Section 17. Phase two involves an 'efficiency test' that entails an examination of the counterweighting effects of the merger which may, in turn, lead to a technological inefficiency. This is considered vis-à-vis the effects of substantial competition concerns and the extent to which consumers reap the resulting benefits. At this phase, the public interest implications of the merger are also scrutinized. After this, the Commission may approve the merger, do the same subject to some conditions, or completely prohibit the merger.

 

Securities and Exchange Commission Rules and Regulations (SEC)

These were made subject to the Investment and Securities Act. Under Section 425, it is stipulated that the procedure for attaining approval for a merger entails: filing with the SEC a merger notification which will subsequently be evaluated, filing an application at the Federal High Court to convene a court-ordered meeting, seeking the approval of the merger from the SEC after the passage of the resolution at the court-ordered shareholder meeting, and lastly, ensuring compliance with post-approval requirements.

 

Summary of The Resolution Passed at The Shareholder Meeting of Portland Paints and Products Nigeria Plc

The meeting was held on February 18, 2021, following an order of the Court to do so by Section 711 of the Companies and Allied Matters Act which empowers the court to order separate meetings for the companies affected upon application of either. According to the Order which was issued by the Federal High Court on January 7th, 2021, holders of fully paid ordinary shares of Portland Paints Plc were to convene to consider and approve (via passing a special resolution), a merger between the company and Chemical and Allied Products. During the meeting, it was agreed that the Directors of the Company be authorized to consent to the modification of the scheme which the Securities the Exchange Commission and/or the court may deem it fit to impose.

 

Paragraph 2 of the Resolution states that upon the Scheme coming into effectiveness, all shareholders may either receive N 2.90 cash consideration for each ordinary share of N 0.50 held in Portland Paints or be allotted 1 ordinary share of N 0.50 each in Chemical and Allied Products (CAP) PLC for every 8 shares held in Portland Paints, which will be credited as fully paid at the close of business on the terminal date. However, the latter applies to scheme shareholders who receive the share consideration. The term 'terminal date' is defined on page 25 of the Scheme of Merger as 'the close of business on the Business Day immediately preceding the effective date; being the date on which the registers of members of CAP and Portland Paints will be determined for determining the shareholders eligible to receive the Scheme consideration'.

 

Additional agreements which were reached under the resolution include: that all assets and liabilities of the company including real property, intellectual property will be transferred to the Chemical and Allied Products Plc. All employee rights, duties, and powers of a personal character that could either not be assigned or performed vicariously will also be transferred to CAP without any further act or deed. CAP will also inherit all legal proceedings to which Portland Paints was a party, rights, and obligations under all contracts to which it also is a party, and all monies standing to the company's credit at banks and other debtors within and outside of Nigeria. While the share capital of Portland Paints will also be canceled and the company dissolved, it will not be wound up.

 

Paragraph 4 empowers the Board of Directors of Portland Paints to give effect to the decisions of the shareholder meeting (see illustration 3 below).

 

Illustration 3: Procedures for a Merger Under the ISA

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CAP Vs PPP-Till Death Do Us Part

The marriage between CAP and PPP may not add immediate value to CAP, the early economies may not be realized till the end of 2021, but immediate savings from the joint entity will come from a cut in the collective wage bill, optimization of distribution outlets and warehouses and an improved logistics economy.


Investors may gamble by going long on the bigger company, but much will still depend on whether the matrimony would come over early challenges of differences in character and history. However, all said the new CAP may prove to be an investors fairy tale story if management can cope with the pressure of the journey beyond the fanfare of the wedding.




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Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

 

 

 

 

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