BY OLUSHOLA BELLO, Lagos
Companies always aspire to increase their shareholders’ value To this end, companies listed on the Nigerian Exchange (NGX) Limited have demonstrated the interests of shareholders in mind while making decisions, because the higher the shareholder value, the better it is for the company and management.
Most companies on the NGX that have embarked on merger or acquisition have created value for their shareholders. Example of recent companies that embark on merger are Access Bank and Diamond Bank; BUA Cement and Cement Company of Northern Nigeria (CCNN); as well as Chemical and Allied Products (CAP) and Portland Paints and Products Nigeria (Portland Paints).
Judging from previous mergers, the ongoing business combination between CAP and Portland Paints and Products Nigeria, according to market observers, will lead to greater value creation for the post-merger and enlarged CAP.
It has been revealed that the resilience of CAP over the years and a new impetus as the largest paints company in Nigeria hold out strong prospects for all stakeholders
CAP merger with Portland Paints & Products Nigeria (PPPN) Plc, which has been approved by shareholders of both companies, will create Nigeria’s biggest paint and chemical company by market capitalisation.
The combination of the two companies, both subsidiaries of UAC of Nigeria (UACN) Plc, will birth a bigger entity that will run under the name CAP expected to emerge at the end of the consolidation process. CAP is a subsidiary of UAC of Nigeria, which holds 51.49 per cent of the company’s shares.
Financial analysts agreed that the proposed merger presents a compelling opportunity to create significant value for shareholders of CAP and achieve the company’s strategic growth objectives as a larger company with a broader product portfolio, more corporate-owned brands and diversified revenues.
Equally, the deal will position the business to leverage the combined market shares and influence of the firms in delivering better shareholder’s value while pooling their assets together towards this end.
Already, CAP is a leading paints and coatings company in Nigeria with globally recognised brands such as Dulux and Caplux. CAP manufactures and sells premium and standard paints and coatings and is the sole technological licensee of Akzo Nobel Coatings International B.V. in Nigeria. CAP pioneered the colour centre concept in Nigeria in 2005, which resulted in the evolution of the Nigerian paint industry. The addition of PPPN business is expected to diversify the product offering and create additional synergies in cost management and market reach.
In Nigeria, paint manufacturing companies have been in existence since the early sixties, though most of them existed as subsidiaries of foreign companies until the indigenisation decree that saw many of them being partly or wholly bought over by local investors.
The key drivers of the paint industry in Nigeria have always been the high demand for real estate properties and growing construction market and industrial production. It has been said that Nigeria’s paint industry is projected to record five per cent growth rate from its present estimated $268 million (N96.50 billion) to $377 million (N135.80 billion) by 2025
With almost 30 years in the game, makers of the Dulux paint brands, CAP has come a long way since the company’s listing on the Nigerian Stock Exchange (NSE), now known as the Nigerian Exchange Limited (NGX) in 1991.
The Company in 2020, posted a revenue growth of 3.9 per cent from N8.4 billion in full year (FY) 2019 to N8.7 billion in FY 2020. Gross profit declined 5.8 per cent to N3.7 billion, with gross margin of 42.8 per cent. Gross profit decline due to input cost pressures on account of currency devaluation and supply chain disruptions. EBIT lower at N1.6 billion, largely on account of the decline in gross profit, investments in talent to strengthen the work force and fixed operating cost base despite losing seven weeks of sales.
Profit before tax declined by 29.1 per cent in FY 2020 on account of the combined effects of lost sales during lockdown, devaluation, and supply chain disruptions, while total profit for the year was N1.2 billion.
Free Cash Flow remained very strong at N1.2 billion signifying the continued strong cash generating ability of the company in spite of significant headwinds.
Speaking on the merger, the managing director/CEO, CAP, David Wright, said the firm would become the largest player in the Nigerian paints market by market share which is estimated at 14.9 per cent and this is due to the fact that the Portland Paints’ Sandtex brand provides access to the large, untapped, high volume ‘mid-market and value for money’ segment of the decorative paint market.
Wright added that CAP would emerge as a larger company with a broader product portfolio, more corporate owned brands and diversified revenues.
“The enlarged company will have a broader decorative paint portfolio covering premium, mid-market and value for money segments to the benefit of our customers. Furthermore, CAP is also expected to benefit from enhanced distribution capabilities in addition to economies of scale and operational efficiencies,” he said.
Once CAP and Portland Paints obtain the court order for the merger, after which regulatory approvals will be sought from appropriate bodies including the Securities and Exchange Commission (SEC), Portland Paints shareholders are at liberty to either receive N2.90 in cash for every share they own or accept one share in the enlarged entity in exchange for every eight they currently own.
In a situation where all shareholders go for the one for eight share reconstruction option, Portland Paints outstanding shares of 793.416 million will be converted to 99.177 million units in the new entity, where CAP’s ordinary shares stand at 700 million.
That makes the outstanding shares of the consolidated entity 799.177 million units which, using CAP’s closing share price of N20, will bring the company’s market value to around N15.984 billion, making it Nigeria’s most capitalised paint and chemical company.
The company which is currently trading at N22.20 per share is going to be the largest player in the Nigerian paints and decorative market and is also expected to be able to operate more efficiently given the sheer economies of scale that comes from being part of a larger organisation.