Vassiliko-Cyprus Cement merger gets CPC approval

Cement price freeze until March 2009, new production unit by end-2010

 

The merger of the island’s two cement producers will go ahead after the Commission for the Protection of Competition (CPC) approved the draft plan between Vassiliko Cement Works Pcl (VCW) and the Cyprus Cement Company Pcl (CCC), giving them the green light for the deal subject to certain conditions.

Under the deal, VCW will acquire the cement-related operations of CCC as well as CCC’s investments in Latouros Quarries Ltd, CCC Aggregates Ltd, Athinodorou Beton-Transport Ltd, Athinodorou Beton-Estates Ltd, Athinodorou Beton Ltd and ELMENI (Quarries) Ltd.

The agreement also envisages the gradual reduction of CCC’s cement production in the next years at the Moni plant and the output replacement by VCW’s planned new production line with an estimated annual clinker capacity of 1.45 mln tonnes and an estimated annual cement production capacity of 2.4 mln tonnes from a total of 1.8 mln in 2007.

The cost of the new factory to be undertaken by VCW will reach EUR 125 mln and is forecast to become operational by the end of 2010. The new plant will increase capacity allowing VCW to reduce costs by exploiting the economies of scale and at the same time contribute to a substantial reduction in gas emissions and meet the EU’s stringent CO2 emission reduction targets.

 

— Conditions

 

The CPC’s approval paving the way for the merger to proceed is subject to minimum conditions that both parties have been committed to. These conditions stipulate that:

(1) There will be a freeze of cement prices until March 31, 2009. The price of cement is currently CYP 35.50 (EUR 61) per tonne. This means that even if there are increases in fuel, electricity and raw material costs by March 31, 2009, VCW cannot apply an increase. Pet coke prices are up from CYP 36/tonne in April to CYP 46/tonne by July, while coal prices (mainly used at Moni) are up 42% since the beginning of the year. All such increases will be absorbed by the new entity.

(2) After April 1, 2009 and until the full operation of the new production unit at the Vassiliko area end of 2010, price increases will be made based on a formula agreed with the CPC and will refer to energy (pet coke, coal, electricity) and labour cost increases, but the base of comparison will remain March 31, 2009.

(3) When the new production unit becomes fully operational at the end of 2010, all price restrictions will be lifted.

(4) The gradual reduction of the Group’s market share in the ready mix concrete market in the Paphos district to below 50% market share.

(5) VCW and CCC will undertake not to import cement, except in the event where demand is in excess of supply and no alternative solution is available (third party importers) or due to mechanical faults or breakdown.

(6) No restrictions should be imposed on the usage of the Vassiliko port by third parties who will be allowed to use the facility (the only port fit for heavy industrial purposes such as cement) for imports of cement.

(7) The continuous supply of cement to existing or potential clients without any special treatment to any of the companies/clients involved in terms of quality or pricing.

 

— CO2 emission reductions

 

Following the July 18 decision by the European Commission to reduce the allocation of greenhouse gas emission allowances to Cyprus and other member countries, the total CO2 emissions allocated to Vassiliko by the Cyprus government were reduced to 5.48 mln tonnes for 2008 from 7.2 mln tonnes previously, while the allocation reserved for Cyprus Cement was 362.000 tonnes for 2008.

VCW and CCC officials had based the CO2 reduction pledge as one of their key arguments to win over the CPC, arguing that left alone, they would not be in a position to modernise their operations and meet the EU’s tough emission control reduction targets, but through the merger, not only would they meet the targets, but also help in reducing the country’s overall targets.

Cyprus Cement was also arguing that with such a low emission allocation, it was in no position to increase production, with the modernisation drive further restricted by local authority zoning and planning restrictions as the area where Moni is located is fast becoming a residential area.

 

— EGMs to approve deal

 

Following the CPC approval, both companies will now draw up the final agreement and then seek approval from shareholders’ extraordinary general meetings.

VCW will issue 18.199.794 shares to CCC at the weighted average of VCW’s closing price during the three months that preceded the date of the agreement (March 9, 2007).

The shares will represent 25% of the issued share capital of VCW and will be listed on the CSE.

According to estimates, the issue price of the new shares will stand at EUR 2.72 per share, with the total consideration amounting to EUR 49.5 mln according to Marfin Egnatia estimates, while Sharelink Research estimates the share issue price at EUR 2.89 for a total consideration of EUR 52.6 mln.

Assuming that VCW will acquire 100% of CCC’s cement production line (excluding any other business lines), Egnatia believe that this will have an additional contribution to VCW’s revenues by CYP 16 mln (450,000 tonnes of cement production sold at an average price of CYP 35.5 per tonne). In addition, given that VCW’s cost structure is at least maintained and no additional synergies are processed then this will add CYP 2.5 mln to the new entity’s bottom line.

 

— VCW to exit Main Market

 

VCW will probably be forced out of the CSE’s Main Market since it will not be able to satisfy the minimum public dispersion rules. Once approved, CCC will hold 25.3% of the share capital of the enlarged company with Italcementi Group, presently at 33%, dropping to 25.3% and Hellenic Mining Company also seeing its stake falling to 25.3%.

Holcim Group, the giant Swiss cement conglomerate which has 19% in CCC will participate in the new Vassiliko through CCC’s 25.3% stake. The other principal shareholder of VCW is the AG Leventis Foundation, which will be left with a 5.5% stake after the merger.

This means 82-85% of the capital will be shared among the major shareholders, leaving only 15-18% among the public and since none of the major shareholders wishes to reduce its stake, there is a good possibility that VCW will be forced out of the Main Market but will remain a CSE-listed stock.

 

— Tenders

 

Tenders for the construction of the new factory will be issued immediately after EGM approval is secured sometime by the end of September, so that construction work may start early 2008 with the aim of having the new plant fully operational by the end of 2010.

While the new entity will be fully responsible for the staff employed at both companies, VCW will have no say, obligation or gain from the CCC’s responsibilities as regards the eventual dismantling of cement operations at Moni, the disposal and safe storage of production facilities, some of which dating back to the 1950s have been made by heavy use of asbestos, as well as cleaning up the land and securing permits to convert from industrial to residential in order to realize the full potential of the land holdings.