Stakeholders are seeking a forensic audit of Lafarge Africa PLC to determine the fairness and propriety of its management’s decision, and allay fears of increase of LafargeHolcim’s majority shares in the company under several guise, writes Capital Editor TAOFIK SALAKO
Shareholders and concerned capital market operators have called on the capital market authorities to undertake a forensic audit of Lafarge Africa Plc to determine the fairness and propriety of the cement group’s management decisions to the Nigerian share-holders.
They alleged that Lafarge Holcim, the majority core investor in Lafarge Africa, used subterfuges under the guise of financial engineering and group restructuring to unduly overleverage the Nigerian company, propped up Lafarge Holcim’s failing South African business and in the many cycles of capital restructuring and share issuances, increase Lafarge Holcim’s majority shareholding in the Nigerian company.
The Nigerian Stock Exchange (NSE) at the weekend listed Lafarge Africa as the latest company with a free float deficiency, after Lafarge Holcim increased its majority shareholding to 83.3 per cent from about 71.4 per cent. The NSE flagged Lafarge Africa as a company “below listing standard” with a free float of 16.13 per cent, 3.87 percentage points below the minimum 20 per cent free float for companies listed on the main board of the Exchange.
Free float, otherwise known as public float, refers to the number of shares of a quoted company held by ordinary shareholders other than those directly or indirectly held by its parent, subsidiary or associate companies or any subsidiaries or associates of its parent company; its directors who are holding office as directors of the entity and their close family members and any single individual or institutional shareholder holding a statutorily significant stake, which is 5.0 per cent and above in Nigeria.
Under the existing rules, companies listed on the premium board are required to have 20 per cent free float or more than N40 billion of their capitalisation in the hands of general investing public. Companies on the main board are required to have a minimum free float of 20 per cent of their market capitalisation, implying that 20 per cent of the companies’ shareholdings must be available for minority retail shareholders. However, companies on the Alternative Securities Market (ASeM) are required to have 15 per cent free float.
Stock markets generally maintain minimum public float to prevent undue concentration of securities in the hands of the core investors and related interests, a situation that can make the stock to be susceptible to price manipulation and illiquidity.
Shareholders and capital market operators who spoke to The Nation called on authorities at the Securities and Exchange Commission (SEC) and NSE to investigate the decisions of the board and management of the company and its operations in the past five years, alleging that the foreign majority shareholder, which controls the management, set out deliberately to short-change minority shareholders.
They raised several posers for consideration by the regulatory authorities including what due diligence informed the group strategy launched in 2014 and the sudden decision to backtrack from the strategy after Nigerian minority shareholders had suffered heavy losses in built-up negative earnings and reduction in shareholding? Why did Lafarge Holcim opt for self-advanced loan rather than equity recapitalisation only to turn around for conversion of such loans to equities under rights issues? They noted that Lafarge Holcim historically built up its controlling shares in the Nigerian company using the same approach of overleveraged recapitalisation. They called for investigation of related-party transactions by Lafarge Holcim and directors of the company in order to determine that decisions were taken in the best interest of the company rather than pecuniary interests of the directors and the major shareholders.
The Mobolaji Balogun-led board of directors of Lafarge Africa has put five resolutions to authorise the sale of Lafarge Africa’s South Africa’s business, Lafarge South Africa Holdings (Pty) Limited (LSAH), to Lafarge Holcim as part of the special business at the company’s annual general meeting later this month. The flagship of the cement group, Lafarge Cement Wapco Nigeria Plc, which transmuted to Lafarge Africa, had in 2014 bought the South African business from LafargeHolcim under a new growth strategy to create a leading Sub-Saharan Africa building materials giant.
Under the transaction, Lafarge Group transferred its direct and indirect shareholdings in Lafarge South Africa Holding Limited of 72.4 per cent and its equity stakes in three other cement companies in Nigeria-United Cement Company of Nigeria Limited, 35 per cent, Ashaka Cement Plc, 58.61 per cent and Atlas Cement Company Limited, 100 per cent to Lafarge Wapco for a cash consideration of $200 million and the issuance of some 1.4 billion Lafarge Africa shares to the Lafarge Group.
Specifically, Lafarge Africa had paid $200 million cash and additional allotment of 724.76 million ordinary shares to acquire the 100 per cent stake in LSAH in 2014. Lafarge Africa had paid the cash and shares allotment to Financiere Lafarge SAS, a wholly owned subsidiary of LafargeHolcim Group.
President, Association for the Advancement of Rights of Nigerian Shareholders (AARNS), Dr Faruk Umar, said the 2014 growth strategy was the beginning of problem for the Nigerian company.
While agreeing that the decision to quit LSAH might be a good development for shareholders who had groaned under mounting losses, Umar called for investigation of the circumstances surrounding the deals and decisions in recent years.
According to regulatory filings and shareholders’ notice, LafargeHolcim proposes to acquire LSAH through a $316.3 million inter-group loans swap. The boards of directors of Lafarge Africa and Lafarge Holcim have signed on to the deal and are recommending approval of the transaction to shareholders.
Under the proposed sale, LafargeHolcim agreed to take over 100 per cent equity stake of Lafarge Africa in LSAH in exchange for a set-off of all the outstanding amounts due by Lafarge Africa to Caricement under the inter-group loan agreements at the closing date which is July 31, 2019. Caricement is a wholly-owned subsidiary of Lafarge Holcim.
According to official reports, the value of the consideration at the closing date is $316.289 million being the sum total of the principal sum of $293 million and all accrued interest of $23.289 million as at July 31, 2019.
“We will call on SEC to investigate the transaction and if necessary do a forensic audit to protect Nigerian shareholders,” Faruk said.
He said Lafarge Africa must halt further right issues and reconsider its business growth strategy if shareholders will benefit from their investments in the company.
“There is also a need to reconstitute the membership of the board of directors if any meaningful progress is to be made,” Faruk said.
Capital market operators, who spoke under condition of anonymity, said Nigerian capital market authorities should do critical reassessment of Lafarge Africa in recent years.
A leading dealing member at the Exchange said the disposal of LSAH is just portfolio restructuring and financial engineering by LafargeHolcim, adding that the transaction is a possible case for forensic audit.
The dealing member said institutional investors such as pension funds should lead the charge for forensic audit bemoaning the propensity of many minority shareholders to trade key corporate decisions for pittances at general meetings.
President, Constance Shareholders’ Association, Mr. Shehu Mikail, claimed that the complex transactions were part of a game plan by LafargeHolcim in collaboration with some Nigerian operators to short-change Nigerian minority shareholders.
According to him, there is a need for forensic audit to ascertain the truth, transparency and accountability of the deals and to unearth the motive for the buyback of LSAH by LafargeHolcim.
“This calls for proper investigation,” Mikail said, expressing worries that Nigerian shareholders would be short-changed in the ensuing transactions.
Despite the promises of synergies across the markets, the South Africa’s subsidiary has since been a drag on the performance of Lafarge Africa, which reported a net loss of N10.37 billion by the third quarter of the 2018 business year.
According to the cement group, LSAH’s operations have been subjected to shrinking demand in South Africa. The competitive environment, slow recovery and struggle to defend market share have heightened market pressure to reduce prices, significantly impacting LSAH’s operating margins in recent years.
As part of its audit exercise with respect to the 2018 accounts, KPMG Professional Services as auditors of the company, had informed Lafarge Africa’s management that, based upon its assessment of the 2018 performance of LSAH, the valuation of LSAH in the accounts of Lafarge Africa would have to be impaired to a tune of N70 billion.
The board thus delayed the approval of the 2018 accounts whilst seeking the optimal resolution of the impairment which had a potential major impact on shareholders’ value of the company.
“During deliberations by the board on this matter, various options were considered including exit from South Africa, the board then arrived at the conclusion that the disposal of LSAH as the best option for halting the potential impairment. In addition and based on well considered metrics and the very limited time to explore other options, the board concluded that a buy-back by LafargeHolcim was the most appropriate means of deriving the best value from the proposed sale in the interest of all stakeholders and most especially the minority shareholders. Understanding the implication of the potential impairment on the company, LafargeHolcim acted timeously by entering into negotiations with the company with respect to the potential sale,” Lafarge Africa explained in a regulatory filing at the Nigerian Stock Exchange (NSE) yesterday.
According to the board of Lafarge Africa, the proposed sale is expected to enhance the value of shareholders’ investments in Lafarge Africa.
The board noted that following the conclusion of the proposed sale, Lafarge Africa’s shareholder loan of $293 million as at July 31, 2019, which represents the only existing foreign currency loan in the books of the company will be completely extinguished.
This full repayment of the shareholder loan is expected to protect and preserve Lafarge Africa’s net Income and cash flows considering the resulting decrease sums to be applied towards debt service while the overall company’s debt will be reduced by N115 billion and an additional N47 billion by the eventual deconsolidation of LSAH.
“The improvement in cashflow and net income, resulting from the reduction in debt service outflows, will enable Lafarge Africa to consider additional investments in cement production capacity to improve its market share in Nigeria. The sale is expected to boost the company’s profitability, through positive cash flow generation,” Lafarge Africa stated.
Lafarge Africa had had on November 24, 2017 launched an offer to raise N131.65 billion through a rights issue of about 3.1 billion ordinary shares of 50 kobo each at N42.50 per share. The new shares were pre-allotted to shareholders on the basis of five new ordinary shares for every nine ordinary shares held as at the close of business on November 1, 2017. The acceptance list opened on Friday November 24, 2017 and ran till the close of business on Friday, December 15, 2017. Lafarge Holcim, using debt-for-equities conversion deal, picked up its rights fully and further subscribed to the un-allotted shares, thus raising its percentage shareholding by 4.97 percentage points from pre-rights issue position of 71.35 per cent to 76.32 per cent after the rights issue.
Lafarge Africa also launched another rights issue in December 2017 offering 7.43 billion ordinary shares of 50 kobo each at N12 per share. The rights were pre-allotted on the basis of six new ordinary shares for every seven ordinary shares held as at the close of business on Tuesday, December 4, 2018. Acceptance list for the N89.2 billion rights issue, which had opened on Monday December 17, 2018, closed on Monday January 28, 2019. The N89.2 billion rights issue was also structured like the November 2017 rights issue, including a convertible deal that allowed LafargeHolcim to convert its debts to equities. This further increased LafargeHolcim’s majority stake.