23 October 2017
PPC – AfriSam Merger Presentation II
Items covered in this document
• Share Price Performance
• Historic Earnings Performance
• Rationale for the Merger
• Merger ratio
• Competition remedies
• AfriSam Capex
• Process and timelines
• Annexure
2
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Volume Share price
Share price performance
3
PPC announces receipt of
expression of interest
from Dangote Cement
• Share price has rallied since announcements of (indicative) offers - the unaffected PPC share price pre any offer
announcements was R5.45 (as of 1 September 2017)
Fairfax offer submitted to
PPC
Announcement on 4 Sep
indicates two further
indicative offers
Unaffected share price = R5.45
News flow of
AfriSam’s
pending new offer
and “international
equity partner”
AfriSam
cancels
Heads of
Terms
Withdrawal
of interest
by Dangote
Cement
Prudential, PIC &
Value increase
shareholding
Source: Capital IQ
Items covered in this document
• Share Price Performance
• Historic Earnings Performance
• Rationale for the Merger
• Merger ratio
• Competition remedies
• AfriSam Capex
• Process and timelines
• Annexure
4
Turning point or race to the bottom still underway?
5
--
0.50
1.00
1.50
2.00
2.50
3.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Share price HEPS Broker forecast HEPS
2008 2009 2010 2011 2012 2013 2014 2015 2016
(31%) 12% (3%) (26%) 24% 4% (3%) (40%) (69%)
13.0x 10.4x 12.2x 13.1x 14.8x 14.8x 14.2x 13.9x 9.3x
2017
S/P growth
Fwd PE multiple
13.1x
11%
(LHS) (RHS) (RHS)
Source: Capital IQ
40.6%EBITDA
margin33% 36.2% 31.0% 29.7% 27.7% 25.3% 24.8% 24.7% 18.9%
Historic Analyst EBITDA Forecasts
6
2,183 2,358 2,290 2,290 2,065
2,141
2,409
2,830
0
1,000
2,000
3,000
4,000
5,000
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
ZAR millions
Actual FY13-17 Forecasts Current Forecasts
Source: Capital IQ
Historic Analyst EPS Forecasts
7
159.0 158.0 131.0
66.0 37.5
38.0 46.0
66.0
0
100
200
300
400
500
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Rand Cents
Actual FY13-17 Forecasts Current Forecasts
Source: Capital IQ
Items covered in this document
• Share Price Performance
• Historic Earnings Performance
• Rationale for the Merger
• Merger ratio
• Competition remedies
• AfriSam Capex
• Process and timelines
• Annexure
8
9
Major cement players and some M&A activity
Annual Production Capacities
1. CNBM (China): > 400m tons
2. HolicimLafarge (Europe): ± 340m tons
3. Anhui Conch (China): > 200m tons
4. Jidong (China + RSA): > 100m tons
5. Heidelburg (Europe): > 120m tons
Top 100 in the world
• Dangote (1st in Africa) > 40m tons
• AfriSam (RSA & E/Africa): 5,9m tons
• PPC (RSA & Africa): 11,4m tons
The last 5 years has seen M&A Activity in
• China
• India
• Europe
• Latin America
• Africa (not that significant though)
Declining global demand resulting in worsening capacity utilisation, lower EBITDA margins and
increased M&A activity in the sector
Rationale for PPC merger with AfriSam
10
Consolidated
cement
champion
SA economic
and social
responsibility
BEE
Synergies
• Potential to compete against international consolidated multi-nationals and regional powerhouses
• National champion meeting need for consolidation - keeping the SA identity alive in the cement
industry
• Complementary portfolios with limited overlap in South Africa
• Encourages local employment
• Unlocks South African economic growth through infrastructure development
• Promotes skills development and training within South Africa
• Creates a sustainable future for the South African cement industry
• Pro-forma 17% BEE ownership from PIC and Phembani shareholdings
• No dilution to existing PPC shareholders
• Alternative BEE solutions could be costly, inconveniently timed and potentially dilutive
• Case study: Sasol lost 7% of its value on news of the replacement BEE transaction
• Optimization of route-to-market
• Ability to procure goods and services better as a larger player
• Rationalisation of central overheads and operational costs
• International cement mergers set precedent for synergy unlock
• Average annual pre-tax cost-saving estimated at R800m
As outlined in the SENS announcement released by PPC on 13 February 2017, we believe the merger will achieve significant benefits:
Items covered in this document
• Share Price Performance
• Historic Earnings Performance
• Rationale for the Merger
• Merger ratio
• Competition remedies
• AfriSam Capex
• Process and timelines
• Annexure
11
Merger ratio delivers a premium to PPC across multiple metrics
12
Proposed merger ratio of 64.6 : 35.4 (enterprise value basis) ≈ 58 : 42 (equity value basis)
• The merger ratio compares to:
Implied enterprise value ratio 64.6% 35.4% %
Installed Cement Capacity1 64.3% 35.7% %
Proportional Cement Capacity 64.5% 35.5% %
EV / Installed Capacity 1 387 1 389 R/t
EV / EBITDA2 6.7x 6.2x x
PPC AfriSam Unit
Notes:
1) 38% of Habesha volumes
2) Stripping out the value of the deferred tax asset attributable to AfriSam
Other relevant metrices:
• Sales Tonnes ratio
• Proportional Sales Tonnes (over ramp up period) ratio
• EV / Sales Tonnes
• EBITDA / Sales Tonnes
Merger ratio
13
What happened to the previous valuation work?
• Original valuation work influenced by certain objectives
• Qualitative factors of additional capital injected into AfriSam not considered
• Commercial aspects of operations in Rest of Africa yet to be overlayed onto merger ratio
Any other issues?
• If the transaction is implemented as an asset disposal by AfriSam, as opposed to a share exchange, the benefit of the
assessed loss (as guaranteed by the PIC) will be foregone
• AfriSam structure will be cleaned up and simplified pre any merger
• Tanga tax charge (estimated to be c.R60m) taken into account in merger ratio
Why is a like-for-like multiple applied?
• AfriSam benefits from R4bn capital injection plus c.R3bn PIK conversion pre merger which directly impacts on “equity” and PAT
for purposes of determining merger ratio
- Assessed tax loss of c.R2bn (R555m deferred tax asset) guaranteed by PIC directly impacting “equity” value
• Multiples supported by further ratios as depicted on previous slide
A R4bn equity injection would benefit all shareholders
14
Balance sheet
Liquidity
• Improved leverage of below 1.5x vs. Dangote (1.5x) and Lafarge Africa (2.5x);
allows for access to cheaper funding to pursue strategic and operational objectives
• Optimal CAPEX to take advantage of growth, optimise production cost as opposed
to cutting back c.R250m in FY18 & FY191
• Improved ability to refinance R1.6bn long term debt maturing in FY19
• Eliminate potential need to use revolving facility for DRC first sponsor obligations:
• Annual obligation (capital + interest) = c.R460m
• Remaining deficiency funding = c.R280 - 350m
• Utilise AfriSam free cash flow previously used to service debt to be distributed as
dividends to merged HoldCo
1) PPC Investor Day Presentations September 2017 (and 2016)
PPC’s SA Cash Flow inadequate for DRC Funding needs
15
ZAR millions 2018 2019 2020 Notes
HSBC Forecast (05 June 2017) 1,383 1,578 1,825
UBS Forecast (23 Aug 2017) 1,153 1,443 1,586
Southern Africa EBITDA (Average) 1,268 1,511 1,706 Includes South Africa and Botswana
Less: Discount to Average SA EBITDA - - - Assumed no discount to analyst forecasts
Net SA EBITDA 1,268 1,511 1,706
Less: SA Taxes (123) (177) (224) Excludes taxes on ROA
Less: SA Changes in Working Capital - - - Assumed no changes in SA WC, excludes ROA
Southern Africa Post-Tax CF from Operations 1,145 1,334 1,482
SA Capex (600) (800) (1,000) Per Sep 2017 capex guidance; FY18 ~R300mm down from Jun 2017 guidance
DRC Shortfall Funding (319) - - Per Sep 2017 guidance: $15mm funded + $10mm expected through Mar 2018
DRC EPC Fee (312) - - $24mm, currently being negotiated
Southern Africa CF From Investing (1,231) (800) (1,000)
SA Debt Service (216) (1,816) (316) Per FY17 debt schedules
DRC Debt Serviced Funded FY18 (442) Per Sep 2017 guidance: $17mm funded + $17mm expected through Mar 2018
DRC Debt Service Funded FY19/20 (398) (420) Per UBS' downside scenarios (i.e. 0% EBITDA Margin in FY19/20)
Southern Africa CF from Financing (658) (2,214) (736)
Southern Africa Net CF (744) (1,680) (255)
Cash Balance
Beginning SA Bank Balance (including Pula) 454 100 100
SA Net CF (744) (1,680) (255)
Net Proceeds from Debt Issuance/Refinance and/or Share Issuance 390 1,680 255
Ending Rand Balance 100 100 100 Assumed min R100mm cash balance
Cumulative Debt Issuance/Refi and/or Share Issuance 390 2,070 2,324
Potential cash shortfall: Based on public information, there is a substantial cash shortfall over the next
3 years plus
Sensitivity Analysis: Cumulative PPC Cash Shortfall through FY20
16
Cumulative Cash Shortfall Through FY20
ZAR millions Discount to Analyst Forecast for SA EBITDA
2,324 0% 5% 10% 15% 20% 25%
UBS Downside 818 2,324 2,549 2,773 2,997 3,221 3,446
Mid-Point 562 2,068 2,292 2,516 2,741 2,965 3,189
UBS Base 305 1,811 2,036 2,260 2,484 2,708 2,933
Total FY19/20
Funding to DRC
(Rmm)
Considerations for Rest of Africa – 40% of PPC’s total installed capacity
17
DRC1
Ethiopia
Rwanda
Tanzania
• Dampened economic growth (political instability & deflated commodity
market)
• Reduced ramp up rate and ability to distribute in market
• Pricing pressure due to oversupply in conjunction with the above
• Market oversupply expected to continue till beyond 2020
• Working Capital constraints coupled with questionable plant quality
• Raw material supply constraints
• Minority share with limited ability for strategic input
• Importing pressure from oversupplied Tanzania market
• LOM constraints of ~12 years
• Oversupplied market
• Pricing pressure
Zimbabwe
• 0% GDP growth results stemming from political uncertainty and
economic policies dampens demand
• Liquidity issues stemming from legislation preventing cash generated to
be moved out of country
Country
capacity, mtpa In-country / operational considerations
15.5
Excess supply
150%
80%
15%
120%
110%
1) Considering Western market only
* Demand / Capacity values based on The Global Cement Report – Twelfth Edition
2.5
0.6
11.0
2.6
Items covered in this document
• Share Price Performance
• Historic Earnings Performance
• Rationale for the Merger
• Merger ratio
• Competition remedies
• AfriSam Capex
• Process and timelines
• Annexure
18
Competition Landscape
19
Background
• The South African cement industry is currently facing significant challenges as a consequence of several factors, including:
• Increased competition from foreign owned cement producers (Sephaku and Mamba) with further foreign owned firms
(Osho/Heidelberg) anticipated to enter the South African cement market within the next two years
• Significant levels of overcapacity with existing levels of current production capacity exceeding demand by
approximately 5 million tonnes, with additional capacity anticipated to come on line within the next two years.
• Demand growth is currently negative with limited spending by government on new infrastructure and very low
investment by private sector in commercial buildings.
• Price earnings pressure which is caused primarily by overcapacity in the market and imports.
• Concentrated retail sector in South Africa (one of the major customer segments for cement products), which has
significant bargaining power.
• With a view to a potential merger with PPC, AfriSam engaged competition lawyers and economists to assess the proposed
transaction in order to determine whether it was likely that it would receive regulatory approval.
• The lawyers and economists performed an extensive analysis over a two year period and the parties also engaged the
regulatory authorities. Both parties have previously publicly stated that they are confident of a positive outcome.
• Two stage approval process could also address other concerns
Competition Landscape
20
Rationale
• Inland
• Post-transaction, the total capacity of rivals to a combination of PPC and AfriSam will be equal to approximately 70%
of total demand in the inland area.
• This provides a powerful constraint on any combination of PPC and AfriSam as more than three quarters of the
combined entity’s inland sales could be lost to rivals if the combined entity sought to raise prices
• Western Cape
• PPC is currently the only cement producer in the Western Cape.
• AfriSam has an undeveloped limestone deposit at Saldanha in the Western Cape – a decision is yet be made on this
deposit.
• Imports potentially serve as an important competition constraint on PPC in the Western Cape (particularly in respect of
bagged cement).
• Eastern Cape
• PPC currently has the only cement plant in the Eastern Cape
• AfriSam currently transports cement from its plant at Ulco in the Northern Cape into the Eastern Cape.
• Imminent proposed new entry by a large competitor, Osho (in conjunction with Heidelberg), which plans to develop a
new grinding facility at Coega, which could supply a large proportion of demand in the Eastern Cape.
Competition Landscape – SA Regional markets
21
Central
AfriSam 1.5
Operational Capacity, mtpa
Eastern Cape
Osho 0.6
PPC 0.3
+ Imports
KZN
NPC 1.5
+ Imports
Western Cape
PPC 1.1
+ Imports Cape Town
Saldanha
Port
Elizabeth
East London
Port Shepstone
Durban
Richards Bay
Nelspruit
PolokwaneGabarone
Lichtenburg
Kimberly
Johannesburg
*
* *
*
**
**
PPC
AfriSam
Sephaku
Lafarge
NPC
Mamba
Grinding plant only*
2.4 mtpa
11.6
mtpa
CIF
Inland
PPC 4.5
Sephaku 2.7
Lafarge 2.2
AfriSam 1.5
Mamba 0.8
CIF 1.3
Items covered in this document
• Share Price Performance
• Historic Earnings Performance
• Rationale for the Merger
• Merger ratio
• Competition remedies
• AfriSam Capex
• Process and timelines
• Annexure
22
23
Capex spend has been consistent and in line with industry
benchmarks
378
262
200
8
261 292
201
0
200
9
442
600
1,048
353
201
5
201
6
201
3
1,215
201
4
201
1
200
7
201
2
535
Replacement RationalisationExpansion SHEQAfriSam Group Capex spend, Rm
• Up to 2016, replacement (maintenance) Capex spend has been consistent and in line with
industry benchmarks to ensure plant performance is maintained
• The spike during 2013 – 2015 is attributable to the Tanga Kiln 2 project totalling R1 825m
Capex spend, Rm 2007 - 2011 2012 - 2016
Expansion and diversification 980 2 217
Replacement 740 865
Rationalisation 116 237
SHEQ 106 123
Total 1 943 3 442
Items covered in this document
• Share Price Performance
• Historic Earnings Performance
• Rationale for the Merger
• Merger ratio
• Competition remedies
• AfriSam Capex
• Process and timelines
• Annexure
24
Timing
25
Date Activity
24-26 October Round II PPC Shareholder Roadshow
30 October Completion of Investec Fair and Reasonable
22 November Offer /Merger Circular sent to PPC shareholders
November PPC Interim Results
December Shareholder Meeting
• Fair and Reasonable to be completed by the end of October, partial offer and merger circular sent to shareholders by 22
November in line with the TRP extension granted
Items covered in this document
• Share Price Performance
• Historic Earnings Performance
• Rationale for the Merger
• Merger ratio
• Competition remedies
• AfriSam Capex
• Process and timelines
• Annexure
26
Annexures
• BEE cost precedents
27
Level of facilitation in precedent BEE transactions1
28
Company BEE stake FacilitationImplied cost for
10% stakeCompany BEE stake Facilitation
Implied cost for
10% stake
BANKS Spar 10.0% 2.5% 2.5%
Absa 10.0% 2.8% 2.8% Clicks 10.0% 1.9% 1.9%
African Bank 10.0% 4.3% 4.3% HEALTH
FirstRand 10.0% 3.2% 3.2% Medi-Clinic 15.0% 3.5% 2.3%
Standard Bank 7.5% 2.8% 3.7% Netcare 10.0% 3.2% 3.2%
Nedcor 9.5% 3.7% 3.9% Aspen 12.0% 3.8% 3.2%
CONSTRUCTION Adcock 13.0% 3.6% 2.8%
Group Five 26.1% 6.0% 2.3% INSURANCE
Murray & Roberts 10.0% 3.4% 3.4% Mutual & Federal 11.0% 3.1% 2.8%
PPC 15.0% 3.2% 2.2% Santam 10.0% 1.0% 1.0%
CONSUMER GOODS LIFE ASSURANCE
Distell 15.0% 2.0% 1.3% Discovery 7.0% 2.2% 3.1%
Tiger Brands 4.0% 1.1% 2.6% Liberty 9.4% 2.7% 2.9%
SAB Miller 8.5% 2.4% 2.8% Old Mutual 5.6% 3.2% 5.6%
GOODS & SERVICES MINING
Bidvest 15.0% 1.0% 0.7% Goldfields SA 15.0% 2.9% 1.9%
Edcon 10.6% 2.9% 2.7% Anglogold 1.9% 1.0% 5.2%
Woolworths 10.0% 1.6% 1.6% Angloplat 22.0% 6.8% 3.1%
Nampak 10.0% 2.6% 2.6% Kumba2
58.0% 3.0% 0.5%
Imperial (Lereko) 7.3% 0.5% 0.7% OIL AND GAS
Sappi 4.5% 2.2% 4.9% Sasol 10.0% 2.8% 2.8%
Tongaat 26.0% 3.8% 1.5% TELECOMMUNICATIONS
Hulamin 15.0% 3.3% 2.2% Vodacom 6.3% 1.8% 3.2%
Massmart 10.0% 2.3% 2.3% MTN 4.0% 1.1% 2.8%
Pioneer Foods 13.5% 1.4% 1.0% AVERAGE 12.3% 2.7% 2.7%
Precedent BEE transaction
cost analysis is shown
alongside
The level of facilitation is
measured either by the
explicit upfront cost, for
example in the case of a
discount on the shares, or
on an option-pricing basis
Precedent BEE
transactions indicate
that the level of
facilitation has
averaged around
c.2.7% of market value
for a 10% BEE
transaction
Notes:
(1) Source: RMB analysis
(2) Considered an outlier and unlikely that a
similar transaction could be concluded in the
current regulatory environment
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