Cash-flush Afrimat says the deal it has inked to acquire leading construction materials provider Lafarge for nearly R1bn, will give it access to some of the best assets in the SA construction industry amid a lift in demand, at a discounted price.
“This deal gives us access to some of the best assets in the country in this industry,” Andries van Heerden, CEO of the Cape Town-based company that provides industrial minerals, commodities and construction materials, told Business Day.
“We bring a good understanding of the industry and for what we paid for all the assets in the group, we are not overpaying,” he said, adding that the company had gone through a difficult time with frequent changes of senior management, “so we will bring in that stability”.
On Tuesday the R8.6bn JSE-listed building materials and mining firm announced it is buying 100% of Lafarge SA and its subsidiaries, collectively known as the LSA Group, which is owned by a subsidiary of the Swiss-French multinational building materials manufacturer Holcim Group.
Afrimat shares rose the most in nearly seven years, climbing 12.17% to R60.85 by midmorning, its highest jump since August 2016.
The deal which remains subject to various conditions, including receiving customary regulatory approvals, increases Afrimat’s offering in the construction industry by expanding its quarry and ready-mix operations nationally as part of the group's ongoing diversification strategy.
Van Heerden said Lafarge fits perfectly into Afrimat’s construction materials business — which has always had a similar operating model with quarries about the country, a bit of crushing and beneficiation — as Lafarge has 11 operating quarries plus another six or seven that are dormant, and a big limestone mine that supplies the cement factory in Lichtenburg.
The further value in the transaction comes from the fly ash business in Gauteng, as well as the cement business that has a cement factory in Lichtenburg and a grinding plant in Randfontein with a distribution plant in Kempton Park, he said.
Small cap analyst Anthony Clark said the deal was not necessarily about cement but rather about the strategic advantage that comes with the aggregates and the extenders — key components to the overall cement and ready-mix market.
“Anybody can make cement but you have to buy in the extenders to blend the cement down to an affordable price point for the mass market to buy,” said Clark.
“He who controls the extender market and has the ability to track margin alongside the entire value chain will make more money than anybody else.”
The deal will be mainly financed in cash as Afrimat is debt-free and some assets the group will obtain include batching plants, an integrated cement plant, cement grinding plants and cement depots.
As part of the deal, Afrimat agreed to repay the LSA Group’s debt to the Holcim Group amounting to R900m. The first tranche of R500m will be paid on the closing and the outstanding R400m over the next year after that.
In the year ending February 28, Afrimat stated net cash from operating activities of R1bn.
Van Heerden said the construction materials segment was seeing a lift in demand, some of which was state-driven, mainly by Sanral, while a strong residential building market, especially in the coastal regions of the Western and Eastern Cape, was growing.
“The best time to buy any asset is at the lowest end of the market, though it’s always difficult to call the lowest end,” said the CEO, “But considering where we’ve seen our existing construction materials business going in the first quarter of the new financial year, we think the bottom was hit in 2022, and we are seeing a big improvement already”.
“So we see good upside in this business and for the assets that we got, the price that we paid was a significant discount to the value of the assets,” he added.
Dubbing it “the deal of the century,” and one of the best deals Afrimat has ever done in extending the underlying profile of the company, Clark said the acquisition would help to rebalance the group away from bulk materials to a more equitable mix.
“They’ve taken a calculated view that the construction industry will recover in the next couple of years and by buying this operation at a very low price, they are hopefully covering many of the risks associated with taking on this deal,” Clark said.
According to its latest unaudited annual accounts, the net asset value (NAV) of the LSA Group was R1.4bn at the end of December and its attributable profit before interest, taxation, depreciation and amortisation amounted to R38m.
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