As part of the continued restructuring since CDC invested in the company in 2016, ARM Cement is selling its non-cement subsidiaries for $16 million to reduce the debt of the company and strengthen its position in its core cement business.
A shareholder’s extraordinary general meeting on January 22 is expected to green light the disposal of its industrial minerals business, fertilizer business (to Mavuno Fertilizer), its silicates business to ARM Energy and its mining business to ARM Minerals.
After the transactions, the companies will cease to be subsidiaries of ARM and be owned as:
- ARM Minerals and Chemicals (will be 100% owned by 100% by Mavuno fertilizers), which will be 51% owned by Omya (Schweiz) AG and 49% by Pinner Heights Kenya.
- ARM Energy: will be 100% owned by Pinner Heights Kenya.
Pinner Heights is owned by a trust set up for the benefit of ARM’s long-time Managing Director and key man, Pradeep Paunrana who owns 11% of ARM Cement, and his immediate family. A leasing company Vaell has sought an injunction stop the transactions and repossess vehicles leased to ARM Cement, but ARM has objected in court as the assets are not part of the non-cement business being sold.
Elsewhere, a UK firm Exotix has issued a warning on Kenya cement company valuations with the view that the listed cement companies are overvalued due to high prices of clinker, foreign exchange losses and exposure of Kenyan companies to cheaper imports unlike their peer companies in neighbouring countries. Exotix recommends price downgrades of Bamburi Cement (by 2% from the current share price of Kshs 180), ARM Cement (by 22% from Kshs 13) and East African Portland Cement Company (by 32% from Kshs 27).
$1 = Kshs 103.
The shareholders of ARM Cement (Athi River Mining) will meet on August 25 in Nairobi to approve the investment into the company by CDC Group (formerly Commonwealth Development Corporation), the UK government-owned development finance institution. CDC will become anchor shareholder who may contribute to stabling the company share price to the benefit of existing shareholders.
- If shareholders allow the investment of Kshs 14.14 billion, and other approvals are received, CDC (through CDC Africa Cement) will own 37% of the company.
- The IM document (distributed to ARM shareholders) notes that CDC, which previously the used to invest through third parties, resumed directly investing in African businesses in 2012 after change of strategy – and now has stakes including 76% of Feronia (DRC), 70% of Globeleq Power, 31% of Garden City, 24% of GEMS Africa, 20% Africa Foods (Rwanda), 15% of DFCU (Uganda), 15% Miro Forestry (Sierra Leone), and 3.7% of Bridge Academies.
- Shareholders will approve an increase of ARM’s share capital from 675 million to 960 million through creation of 285 million shares. As part of the deal, 353 million new shares will go to CDC and 90 million shares will go to the ARM employee share ownership scheme (ESOP).
- The current largest shareholders are Amanat Investments and the ARM MD (Pradeep Paunrana) with 27% and 18% respectively and their stakes will reduce to 14% and 9% in this deal, while the ARM ESOP stake could go up from 4% to 13%.
- The ESOP is more like an executive compensation plan as most of the shares allocated since March 2007 are to the managing director, the deputy managing directors and other senior managers. Of the 90 million new shares, 55 million are reserved for the managing director, 10 million for a family member, 5 million for the deputy managing director and 20 million for other senior managers of ARM. The amount of share be allocated are conditional on ARM meeting certain targets calculated of minimum EBITDA ($44M in 2017, $77M in 2019) and target EBITDA ($55M in 2017, $95M in 2019) [Note: The company lost lost ~$33 million before tax in 2015 down from a profit of $20 million in 2014]
- The deal will also include a payment of $20M to reduce the debt owed to the Africa Finance Corporation, another $90M in debt payments, and $30M of capital expenditure.
- Kestrel considers the Kshs 40 price to be adequate, but a chart in the IM shows that the share price has dipped from Kshs 80 in May 2015 to hang around Kshs 40 (or below) for all of 2016. On top of that, the new deal will dilute existing shareholders by another 43%.
- The shareholders will also change the company name (from ARM Cement Ltd) to Athi River PLC and will vote to allow (i) board meeting to be held on phone, (ii) payment of dividends by mobile money (iii) annual reports to be published in newspapers or company websites.
- The deal also includes reconstitution of the board to have 2 directors from the promoters (MD’s group) and 2 from CDC with other independent directors. CDC will get to sit on board committees for audit & risk, strategy & investments, HR and a new one called environment, social & governance to be formed as part of the CDC code for responsible investing.
- Deal advisors are Tradeways, Coulson Harney, Kestrel, and Deloitte.
$1 = Kshs 101
We now have more details now about the CDC purchase of ARM Cement.
- CDC African Cement (CADAC) (registered in Guernsey), wholly owned by CDC Group, will pay Kshs 40 per share for 353.7 million shares – an amount of Kshs 14.1 billion (~$139 million) to acquire $41.66% of ARM.
- Shareholders will have to vote to increase share capital of ARM.
- CADAC will also enter an agreement with Pradeep Paunrana (ARM’s CEO) and Amanat Investments (the main family shareholding) (who owned 46% of the company, prior to the CDC investment) to vote in concert with CDC.
- ARM also has to get its lenders and employees to sign on (The Employee Share Ownership Plan – ESOP had issued 21 million shares and owns about 4.6% of ARM).
- The CADAC statement indicates they don’t intend to takeover the company, but there’s no comment on if future plans may include a delisting of ARM, which has cement operations in Kenya, Rwanda, Tanzania and South Africa.
- The deal is planned to be complete by July 2016.
$1 = Kshs 102.
ARM shares are trading between Kshs 36 – Kshs 37.
ARM (Athi River Mining) Cement seems to have been grappling with a short-term debt burden. It was reported that an Indian firm Ultratech was interested in investing $125 million, a few weeks ago for a stake in the firm. But today’s results announced by ARM, which show a full-year loss of Kshs 3.5 billion, 9blamed on an unrealised exchange loss of Kshs 3.7 billion) also came with a notice that the CDC Group, the UK government-owned development finance institution, has committed to invest Kshs 14 billion (~$140 million) for equity in the listed company.
CDC will become the largest shareholder in ARM and the company will use $110 million of the new funding to reduce their short-term debt (payments stand at about $1.5 million per month) and which totaled $200 million at the end of 2015. ARM shares have lost 2/3 of their value, now at 30 after trading as high as 80 in 2013
A few days ago, CDC also announced an acquisition of 10.7% of I&M Holdings, the parent group of I&M Bank. More detail here about ARM’s debt and fund-raising history, and when they kicked Bamburi, then a large shareholder, off their board.
Other Cement Companies
An Oxford Group report notes that The growth in (Kenya) construction activity has been a boon for producers, but the scope for further increases in the near term is sizeable, given that Kenya’s per-capita consumption remains well below that of other major economies on the continent. Annual per-capita demand for cement averages 100 kg, according to sector players, compared with 506 kg in Egypt and 230 kg in South Africa…However, the rise in domestic demand has not necessarily translated to a healthier balance sheet for the country’s producers. The average net profit margins for Kenya’s cement firms hit an all-time low of 11% last year, according to ARM Cement.
- Bamburi: A recent investor note about Bamburi mentions that its shares have gained 25% in the last year and it increased its’ profit by 45% in an industry which recorded a decline in average net profits. Bamburi also has a generous dividend policy and has paid an increasing level of divided since 2011.
- EAPCC East African Portland Cement is said to be trying to negotiate with the government to use some of their vast land holdings in Athi River / Kajiado area to restructure the company.
- Dangote: Is still interested in investing in Kenya? Media reports say there’s a grinding plant in Kenya with others planned.
- Savannah Cement completed a major plant upgrade to boost the firm’s production and efficiency.
It’s crunch time in Kenya’s economy and many companies are feeling the pinch. While operations may be hurting, listed (and unlisted) companies still strive to report (increasing) profits to shareholders and they will look to unconventional, or other income opportunities to deliver by year-end:
East African Portland Cement: Went from a profit warning issued at their ½ year to a full year profit increase thanks to a property revaluation exercise.
Mumias Sugar: Full year profits were attained due to a tax credit they gained from investing in electricity co-generation.
Scangroup: Profit in the ½ year was credited to income from their investment in Government bonds.
Access Kenya: Profit growth in the ½ year was attributed to the strengthening of the US$ against the Kenya shillings – and most of their revenue is dollar-denominated.
Counting on Other Income: Going forward, other companies can also employ similar measures to plug income gaps e.g.
- Tax breaks from listing – Safaricom .
- Green energy – carbon credits, co-generation – Kengen, Safaricom.
- Fibre cable/IT investment writebacks.
- Property and investment revaluations.
- Forex: a weak shilling is usually good for Kenya Airways and tea companies.