CCNN and Obu Cement merger update: Excerpts from the scheme of merger

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CardinalStone Research

Cement Company of Northern Nigeria (CCNN) and Obu Cement Company Plc (Obu) have released a scheme of merger document for their impending business combination (click here to view document). According to the document, Obu’s 40 million ordinary shares of 50 kobo each will be reconstructed to 20.7 billion shares of 50 kobo each of the enlarged entity. This represents a 1 for 518 share conversion ratio. On the other hand, CCNN’s shareholders will be accorded 1 share of the enlarged entity for each CCNN share owned. Thus, the outstanding shares of the enlarged entity would comprise the 13.1 billion ordinary CCNN shares currently available and the potentially reconstructed N20.7 billion new shares in favour of the 40 million ordinary shares of Obu. The implied 33.9 billion shares of the enlarged entity would be 61.2% owned by shareholders of Obu and 38.8% owned by shareholders of CCNN. On adjusting to reflect BUA Group’s 87.4% stake in CCNN, a minority stake in the proposed entity is likely to be closer to 11.0% (3.7 billion shares).
Valuation of current CCNN shares. Going by the scheme document, the total value of shares to be issued for the 13.1 billion shares owned by the scheme shareholders (i.e. CCNN shareholders) is N460.0 billion. This implies that the transaction values CCNN at N35.11 per share, compared to its current market price of N16.40 and our FY’19E BVPS of N25.81. The valuation is also at a significant premium to our 12-month target price of N12.97—which does not capture the proposed addition of the 3.0mtpa Kalambaina line 2. Based on the provided proforma, the enlarged entity would have had ROE and ROA of 15.3% and 10.9% respectively in FY’18 compared to 1.7% and 1.6% respectively for CCNN. Although the estimated ROE and ROA of the proposed entity are biased by a N26.8 billion tax credit, they would still have approximated 9.0% and 6.3% respectively.
Other key information.
  1. The enlarged entity would have an 8.0mtpa cement capacity, comprising CCNN’s 2mtpa capacity and Obu’s 6mtpa plant in Okpella, Edo state. This compares to Lafarge Nigeria’s 10.5mtpa installed capacity.
  2. If approved, the merger will see Obu absorb all CCNN’s assets, liabilities, and undertakings
  3. The deal will also lead to the delisting of CCNN from the Nigerian Stock Exchange and listing of the enlarged entity on 8 January 2020
  4. This deal is strictly a share for share transaction. No cash consideration is involved
  5. This transaction is subject to the approval of shareholders and court sanction.
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