Vetiva Research, September 21, 2010

 

Following regulatory (SEC and NSE) approval of the Scheme of Merger between Benue Cement Company (BCC) and Dangote Cement Plc (DCP), we examine in this report, the key terms of the merger and the expected value-add to both entities post merger. Please see highlights below:

 

Key Facts of the Merger

 

BCC’s shareholders would receive 1 DCP share in exchange for every two held in BCC. In line with the terms of the merger, 494,019,668 DCP ordinary shares of 50 kobo each would be issued to the minority shareholders of BCC; increasing DCP’s number of shares outstanding to 15,494,019,668 from its current 15,000,000,000 shares.

 

The “Effective Date” of the merger is the date the court sanctions the merger scheme, which would have been preceded by separate court ordered meetings of DCP and BCC shareholders.

 

Based on the indicative timelines in the “Scheme of Merger”, BCC shares would be placed on full suspension two days after the “Effective Date” of the merger and subsequently de-listed, following which shares of the combined DCP would be listed on 5th November 2010.

 

 

Investment Thesis for DCP (Post Merger)

 

1.      Dangote Cement owns and operates the 5 million tonnes Obajana Cement Plant, which is the largest cement plant in sub-Saharan Africa. In view of DCP’s continuing investment in expansion, the 3rd and 4th Obajana lines as well as the 6 million tonnes Ibeshe plant are expected to become operational by Q1’11. This brings DCP’s total capacity to c.19 million tonnes per annum by 2011, making the company well poised to drive revenue through robust volume growth.

2.      Another key competitive advantage of Dangote Cement is the close proximity of its cements to the major markets for cement consumption in Nigeria – Lagos and Abuja specifically. Based on our estimates, these regions make up about 39% and 33% of total cement consumption in Nigeria respectively. Evidently therefore, Dangote Cement’s Obajana Plant – the closest cement plant to the Abuja region, has a rather monopolistic advantage in the Abuja market, relative to other local cement manufacturers.

3.      We highlight the fact that there has been an increasing concern of the possibility cement oversupply in the Nigerian market in the next few years. Despite the genuineness of this concern, we do not see any major pressure on Dangote Cement’s revenue growth since the company can readily export to its sister company – Green View Limited (also a subsidiary of Dangote Industries Limited), which operates one of the largest cement import terminals in Ghana, but has been importing from some of the biggest cement producers in the world – China, Thailand, Indonesia, among others. With the current cement supply deficit in Ghana and other neighbouring west African countries, we believe there’s a readymade market for Dangote Cement into the foreseeable term.

 

Key Risks of the Merger

 

1.      As detailed in the Scheme of Merger, some of the risks identified to the merger assumptions include completion risk and threat of gas/fuel shortage.

 

2.      In our view however, the assumptions made with respect to capacity utilization rates appear stretched and they show a deviation from the levels attainable based on historical trends within the Nigerian industry, given the time lag before a new plant typically reaches full capacity utilization.

 

3.      Key Man Risk due to the concentrated nature of DCP’s board

 

4.      Given that the enlarged DCP would constitute about 25% of the Nigerian Stock Exchange total market capitalization when listed, we see some risk to the stock market’s performance as its performance would be relatively dependant on the performance of Dangote Cement Plc.

 

 

Research Division

Vetiva Capital Management Limited

Plot 266B, Kofo Abayomi Street

P. O. Box 73530 Victoria Island

Lagos, NIGERIA

Tel: +234-1-4617521-3, 2700657-8; Fax: +234-1-4617524.

Website: www.vetiva.com 

 

source: Proshare