eBusiness Weekly
Kudzanai Sharara
Ask any African citizen whether they would like to see more or better houses and other facilities such as dams, roads, hospitals and schools and the answer would be a definite yes. The level of infrastructure development in Sub-Saharan Africa is still very low and there is need to narrow this infrastructural gap, which is being worsened by growing populations, rapid urbanisation, and a rising middle class.
It is thus not surprising to see the current bidding wars to acquire Pretoria Portland Cement (PPC), which started when fellow South African company AfriSam announced that it was in discussions with the former for a possible merger or acquisition.
The fact that PPC was entertaining such discussions, attracted other players with Africa’s richest man Aliko Dangote also throwing his hat into the ring. At the last read, Dangote had written to PPC offering cash and shares as part of a takeover deal, amid other plans to be in 18 African countries. LafargeHolcim, the world’s biggest cement maker is also reportedly monitoring the situation while funders, are also backing the bidders, which speaks to the potential in the proposed acquisition.
But what is the attraction in PPC?
Firstly, the demand for cement in Africa is looking positive. According to research done by Nairobi-based AIB Capital in 2016, consumption per capita of cement in Sub Saharan Africa is 82kg, significantly below the world average of 513kg. This is expected to give a considerable spectrum to expand consumption. The main demand driver has been housing, although governments are also now prioritising growing their infrastructural capacity. This is clearly visible in many African countries, where government sponsorship has been the main catalyst for infrastructural development. Donors are also weighing in with important infrastructural projects.
But the question is why PPC, when players can still target green fields and expand? One of the reasons is that there are many cement players operating in the continent, and consolidation would help cut costs and improve efficiencies for the remaining competitors.
Acquisition of PPC by a player already operating in Africa could also bring some consolidation in countries where the two companies operate as separate entities.
PPC has eleven cement factories in South Africa, Botswana, DRC, Ethiopia, Rwanda and Zimbabwe and acquiring the company, automatically increases and accelerates expansion plans for the suitors.
It also makes sense for established players to buy PPC because it helps them control the supply of cement. Having many players playing the African market might lead to oversupply and in the process affect returns. But having a few players has the advantage of controlling supply although there are risks of monopolising the industry.
The acquisition also gives access to a wider market that would normally take time to service. There are high chances that, in countries where it operates, PPC has already secured the limestone deposits needed to manufacture cement and any player coming in will struggle to get deposits with a longer mine life that can sustain the huge investments involved.
Dangote’s expansionist policy in Africa over the past couple of years includes the rolling out of new capacity in thirteen countries across the continent. A number of other companies have also been extending their footprints on the continent making competition for resources very intense.
Although many African countries have a large unmet demand for cement, some analysts suggest there might be too much new capacity. This makes it difficult for players to continue with organic expansion plans without flooding the market with the product.
Following that route is likely to push prices down further but buying out competitors will enable expansion plans without necessarily increasing supply.
In South Africa for example, Dangote has a presence, but it’s not easy for the company to expand further without risking chances of pushing prices lower due to increased competition. But expansion plans can be achieved through the acquisition of PPC, which already has a significant presence in the country.
In Zimbabwe, Dangote has shown interests, but his investments have been stalled by failure to secure limestone deposits to support the plant. This can, however, be solved if the company manages to buy PPC, a company that already dominates the country’s cement market.
Acquisition of PPC will also help existing players such as Dangote to keep down their production costs as it allows them to explore synergies.
For example having PPC in its books, the acquirer will have the advantage of importing clinker from countries where it is in abundance to those where it is in short supply.
While that can be done even without owning the limestone resources, pricing between sister companies would be much reasonable than when it’s done from rival companies.
The strategy for most cement companies is to build integrated plants, where they control both clinker production and grinding and chances are that PPC already has these in place making it difficult for other players to come into the same market.
PPC itself has already been on an expansion drive into the rest of the continent and this increases competition hence acquisition of the company will automatically eliminate competition for resources and for customers.
