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OBU-CCNN Merger… Some value accretion with few blurry lines

• We recently received the scheme of merger document showing details of the proposed merger between CCNN and sister company, OBU Cement (“OBU”), as announced in late October. The merger entails absorption of all CCNN’s assets, liabilities and undertakings by OBU Cement and consequently a delisting of CCNN’s shares from the Nigerian Stock Exchange (NSE) on January 8th, 2020 and listing of the enlarged entity on same day. Upon conclusion of the merger, existing OBU and CCNN shareholders will hold 61.2% and 38.8% of the enlarged OBU which will have total of 33.8 billion shares. For context, pre-merger, OBU held 40 million units of shares (100% held by BUA Group) which is being reconstructed in a 1-for-518 exchange ratio and increased to 20.7 billion units, while CCNN’s 13.1 billion shares, was included in the enlarged entity on a 1-for-1 exchange ratio.
• Going by the valuation provided in the scheme document (See here: ), the additional shares to be created by OBU to integrate all shareholders of CCNN, is valued at N460,022,533,810. This translates to a per share valuation of N35, which is at a premium to CCNN’s current 9M 19 BVPS of N25.6 and market price of N16.4. The merger consideration is at a 74% premium to our FVE of N20.14 for CCNN. At the end of the merger the equity value of the enlarged entity will settle at N1.2 trillion.
• Unlike the previous merger of CCNN and Kalambaina, we see some value accretion for existing CCNN shareholders from the merger. Combining the published FY 18 numbers of both CCNN and OBU (which is yet to reflect the additional 3 MT launched in November 2018) and also adjusting for the increase in the enlarged entity shares to 33.9 billion, we note that the combined entity’s earnings per share and ROE would have settled at N1.90 and 15% respectively (excluding the impact of prior years’ cumulative tax benefit of OBU in 2018, EPS and ROE would have been N0.80 and 6.5% respectively), compared to reported N0.44 and 2% respectively by CCNN. However, the higher EPS and ROE are still below the respective level reported by CCNN as a standalone business in 2017 of N2.57 and 22%.
• Upon conclusion of the merger, total production capacity of the enlarged entity will increase to 8MT, comprising CCNN’s 2MT plant in Sokoto and OBU’s 6MT in Okpella, both of which include new 1.5 MT and 3MT which came on bard late 2018, respectively. Based on CCNN’s price per ton, we estimate that both entities produced 2.8MT in 2018 which translates to a utilization rate of 80% – CCNN on an adjusted basis: 59% and OBU: 68% on 3MT. Interestingly, reflecting the improved energy source at CCNN (now largely coal) starting Q2 2018 and a largely gas powered plant in OBU,  by our estimate, the enlarged entity’s gross margin of 51% inches closer to DANGCEM’s leading margin of 57.5% and above Lafarge Africa’s of 31% (Ex-South Africa).