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



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 do not raise questions about the process, communication management, and the perception related thereto or arising therefrom.


Let us take a look at some fundamental issues ahead of the analysis:


First, in managing the news communication, information had filtered out two 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.


Till date, no formal business combination document has been publicly released and as such, it would be safe to assume that the newspaper reports are no more than corporate press releases, rather than market news.


We recall that one of the problems with this deal was that the ex-NSE management rejected this deal because only 3% was offered to shareholders of BCC Plc. This matter requires a further clarification, including consent from the shareholders of BCC Plc and the compliance with direct/indirect holdings of shareholding by any one individual. Dangote Group owns Obajana Cement Company who owns 74.741% of BCC Plc i.e. 2.9billion units of the shares.



Second, and perhaps more importantly, 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 are the same ones on the selling side of the transaction – with all the implications on transparency, pricing, and the ‘who is working for whom’ question.


Unless a special approval was sought and granted by the SEC, it will be necessary for the SEC to clarify why this was allowed in this ground breaking transaction. Is Afrinvest earning fees from both sides?



Third, it would appear that the decision to approve the merger was not taken at the last AGM of BCC Plc – the listed company on the bourse. We are to assume that this was 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 a situation as obtained with Unipetrol Plc and Agip Plc – which were both quoted companies. We seem to have a situation similar to the Zenon Oil taking over AP Plc situation on our hands. In this latter incident, the shareholders of AP Plc were consulted at an extra-ordinary general meeting held at Ibadan which was forwarded to the SEC. This was rejected by the SEC and remains the reason why the AP/Zenon merger never took place.


This will prove instructive in the days ahead as shareholders role in assenting to such a deal raises corporate governance issues.


The scheme of merger (court ordered document) has now been released and sent out to shareholders. How did the SEC/NSE approve the deal without the shareholders consent given its public interest mandate?


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, curiously, the market wonder how an individual sanctioned by the SEC for matters awaiting judicial pronouncements leading to his removal from the council of the exchange less than a few weeks back – upon which the SEC predicated its decision to take over the NSE; would now have a merger plan approved – which could effectively make him/the company potentially responsible for a quarter of the current market capitalisation.


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.


With the expanded company – to be known as Dangote Cement Company Plc, this should add about N2.13 trillion to the market capitalisation of the NSE and effectively bring the Dangote Group to an effective 43% of the total market capitalisation as at September 6, 2010. That is an interesting scenario to contemplate.


We reiterate that we have nothing against the initiative and we recall that UACN Plc – the group, the first true conglomerate is equally listed on the bourse with a separate and distinct board; having related companies such as CAP Plc, Grand Cereals and UACN properties listed on the exchange. This has never been promoted or reported as a group.


There must be some reasoning to the two approaches and the market may need to take time to discern the emerging trends.



Fourth, the last listing by introduction we had, of this magnitude was the 14 November 2006 approval given by the Council of The Nigerian Stock Exchange through its Quotation Committee to the Transnational Corporation of Nigeria Plc’s (Transcorp) listing by Introduction of 18.55 billion ordinary shares of 50kobo each at N6.00 per share. The shares which was listed on Thursday, November 23, 2006 with a market value of N111 billion is now priced at N0.50k.


Most companies listed by introduction on the NSE in the last 3 years were generally weak companies and are currently facing dire straits – MTS Plc, HIS Plc, MTech Plc, etc are currently trading below listed prices; and a few are facing current NSE sanctions for failure to meet post listing financial reporting requirements less than twenty four (24) months after listing. There are only few sterling examples of listing via introduction – GT Bank Plc listed at N10 per share in 1996 and later conducted an IPO at the onset of the bank consolidation program which established the bank as a value based company – and we are all living testimony as to the strength and character of the commercial lender, now today one of the top three in Nigeria.


The parallel with Transcorp plc should not and must not encourage a comparison with this current bid by Dangote Cement Plc but should raise concerns at the SEC/NSE, which has not had a history of high value listing by introductions – a traditional approach set aside for weak companies without market pedigree.


The point being made here relates to the third point made above; the high price of listings by introduction relative to the market realities and the rules for listing by introduction that should have safeguards to protect investors in the secondary market.


The true test of a company of Dangote’s mettle must be the primary market – the offering of the shares of the merged company, after a listing in no less than 6-12 months.


This is not a notion unique to Nigeria or a recommendation specific to the company. There is a growing debate about the place of listings by introduction and investors protection that we must consider given our recent past.


For example, the Philippine Stock Exchange (PSE) has suspended listings by introduction, other than those applications filed before February 17, 2010 and is reviewing its rules. Companies can list their shares on the exchange by introduction as long as they agree to hold an IPO within 12 months.


The PSE said that “we are reviewing the rule on listing by way of introduction…. to make sure that the rules are consistent and clear so that issuers can be guided correctly and at the same time ensure that the investing public is fully informed of the developments with the issuers,” PSE Chairman Hans Sicat said in a statement on February 2010.


The PSE bourse temporarily blocked companies from listing by introduction last February 18. While it gave no explanation for the suspension, the move came as share prices of companies that had taken this route — listing stocks without necessarily selling these to the public — recently skyrocketed.


The action followed a similar move by the Hong Kong Exchange to halt listing by introduction unless issuers can show they have taken steps to ensure ample liquidity and an orderly market, and until the bourse finds ways of dealing with potential price fluctuations.


At the HHE, the new practice follows an opening-day surge and plunge in shares of Asian Citrus Holdings Ltd., China’s biggest orange plantation owner, that prompted investors to criticize disclosure rules.


Generally, several companies that listed their stocks by introduction in most markets; have seen dramatic increases in their share prices, raising concerns that a loophole was being used to drive up prices.


It is this point that we have yet to receive assurance on from our market regulators in Nigeria.



Fifth, it is not yet known if the new company is the parent company of the other Dangote cement operations in other countries. This information is required to appreciate the valuation as the existing operations in Zambia, Senegal, Benin, Ghana and South Africa do have viable operations, albeit with lower annual production outputs.




Finally, the movement to the capital market arising from the Dangote Cement/BCC merger is a welcome development. It is however not going to absorb the large float from other listed companies arising from the developments in the market and the CBN directive. This listing will only help Dangote cement.


On the economic front, Dangote Cement Plc would prove a beneficial proposition to the economy and investors; if this industry monopoly is able to meet the national requirement without impacting on the ‘competitive landscape’ for other firms – importers and producers – to thrive.


Already, the Dangote Group plans to double operations to 10m tonnes a year, with a further 5m tonnes from a new site. If this is combined with BCC’s 3m tonnes, the new group should by 2012 boast of a production capacity of 18m tonnes a year for the Nigerian market, outside importations.



Source: Proshare



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