12 - 18 April 2001
Issue No.529
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Al-Ahram Weekly On-line 12 - 18 April 2001 Issue No.529 |
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Cement for sale
Three European heavyweights are bidding for a minority stake in a local cement company. Sherine Abdel-Razek assesses the company's potential
Suez Cement, Egypt's biggest cement producer with a market share of 30 per cent, has this week closed the bidding period for approximately 16 per cent of its equity. The company announced that it has received bids from three European companies but it did not divulge the names of these organisations.
This announcement comes a month and a half after the company's general assembly agreed to issue 10.1 million new shares, or 15.8 per cent of the number currently floated, in addition to granting the strategic investor the right to buy another 5.9 million shares through the stock market, potentially bringing the overall stake to 25 per cent.
Currently slightly more than 85 per cent of Suez Cement is privately owned, with 45 per cent floated on the stock market and the remainder in the hands of foreign and local companies.
Despite Suez Cement's sound fundamentals, analysts were sceptical that the offering would create much interest. A minority stake, they suggest, is not very alluring for a multinational company.
During their February meeting, Suez Cement shareholders approved the capital increase stipulating that the only companies eligible to bid for the stake be international ones in the sector which do not have a presence in the Egyptian market.
As the cement industry is considered a strategic sector, the government is reluctant to allow foreign organisations to obtain a dominant position in it. Already 35 per cent of the cement industry is controlled by foreign investors. Companies with a local presence are Penrod Investments Ltd, a subsidiary of Portugal's Cimpor; Britain's Blue Circle Industries; the Mexico-based Cemex and France's Lafarge. But the conditions under which these multinationals invested in Egypt's sector are different from what is being proposed for Suez: through tender offerings all these multinationals own majority stakes in formerly public sector cement companies.
Since these sell-offs, all of which took place within a period of less than six months ending in February 2001, the government has shown reluctance to let individual foreign companies obtain similar niches in the industry.
Through its offering, Suez is seeking a multinational investor so as to tap into global expertise and bring in a healthy injection of foreign capital. A company board member was quoted last week as saying that the main reason a foreign investor is being sought for the stake is to "penetrate other markets through buying other companies in the region." She said a foreign investor would also help develop the company's technical, marketing and administrative capabilities.
Added to this, Suez is looking to reduce its debt, a significant portion of which it incurred last year with its $385 million-acquisition of a 65 per cent stake in Torah Portland Cement. This is a burden Suez is eager to decrease as it has weighed down its share price which has levelled off at approximately LE35 -- half the price it was first floated at.
Although this acquisition has strengthened Suez's hold on the local market, it has, according to a report by the British investment bank Merrill Lynch, undoubtedly hurt its valuation. "The deal will dilute the earnings of Suez as the financial expense associated with the debt assumed by the company will more than offset the additional profits resulting from the consolidation of Torah [Portland] Cement," said the report.
Nonetheless, the company is not without its attractions. Some market observers suggest that the offering is a good opportunity for a foreign investor seeking a presence in the Egyptian market which it might later expand.
Among the factors making Suez an appealing acquisition according to Merrill Lynch is its low share price. Also, when applying the enterprise value to volume of production (EV/Ton), the method used to assess the value of cement producers, the cost of the share is about half what multinationals paid for smaller Egyptian companies in 1999 and early 2000.
Merrill Lynch speculates that the free float might even be enlarged if Portland Torah Cement releases its cross-holdings with Suez Cement (Portland Torah holds 9 per cent of Suez) and with Blue Circle possibly floating its 7.1 per cent after it has already secured a foothold in the market with its acquisition of Alexandria Cement.
This is not all, as another report on the company issued by the local Fleming-CIIC investment house states that Suez also enjoys an "excellent geographic presence" with one of its plants, located in Qatamiya, serving the greater Cairo area where a third of Egypt's demand for cement is concentrated. Furthermore its second plant, located in Suez, is close to several mega projects while its third, the one acquired with its purchase of the Portland Torah stake, enjoys a strategic location 13 kilometres outside Cairo in an area where the government prohibits further industrial expansion because of environmental concerns.
Added to these factors is its sound financial performance. Suez posted a 14 per cent increase compared to the previous year in its unconsolidated profits for 2000. During the same period, its net profits rose to LE300 million from LE263 million, boosted by a one-off divestment gain.
Suez Cement had received LE170 million pounds from the sale of its stake in another Egyptian cement firm to the Swiss conglomerate Holderbank. The company also enjoys the second highest growth rate in production among Egypt's nine currently operating cement companies. In 2000, its production reached 3.7 million tons, a growth rate of 14.5 per cent over the previous year.
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