PPC AfriSam Merger Presentation II · PPC –AfriSam Merger Presentation II. Items covered in this...

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





• Merger ratio


• AfriSam Capex


• 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





• Merger ratio


• AfriSam Capex


• 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:





• Merger ratio


• AfriSam Capex


• 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





• Merger ratio


• AfriSam Capex


• 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





• Merger ratio


• AfriSam Capex


• 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





• Merger ratio


• AfriSam Capex


• 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





• Merger ratio


• AfriSam Capex


• 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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