Nigeria’s 2 top cement makers issuing debt to fund expansion
Nation’s economy is recovering after contracting in 2016
By Emele Onu and Tope Alake
Nigeria’s two largest cement makers are turning to investors to help kick-start growth and take advantage of strengthening sub-Saharan African economies and infrastructure spending, including in their home market.
Lawmakers in Nigeria this month approved a 2018 budget of 9.1 trillion naira ($25 billion), the nation’s biggest spending plan yet, with almost a third of it going into roads, rail, ports and power. President Muhammadu Buhari still has to sign it. In South Africa, where both Dangote Cement Plc and Lafarge Africa Plc also have operations, fixed investment expanded in the last quarter of 2017 as sentiment started to change in the run-up to President Cyril Ramaphosa winning control of the ruling party and becoming national leader in February.
Dangote, controlled by Africa’s richest man, Aliko Dangote, said last month it’s looking to raise $500 million from a Eurobond sale and will also issue 300 billion naira in local-currency bonds to refinance debt and boost expansion. That’s before a proposed London initial public offering in the next two years, which people familiar with the matter have said could raise about $1 billion. Meanwhile, Lafarge Africa, the Lagos-listed unit of Switzerland-based LafargeHolcim Ltd., is seeking to raise about 100 billion naira through equity or debt on top of a rights issue of about 130 billion naira late last year.
“Across the region in the last one or two years, we are seeing improving macroeconomic fundamentals driven by the upturn we are seeing in commodity prices,” Omotola Abimbola, equity analyst at Lagos-based Afrinvest West Africa, said by phone. The fund-raising will allow both companies to reduce debt and financing costs and free up cash, he added.
Dangote, Nigeria’s biggest listed company with operations in 10 African countries, is investing heavily in markets including Tanzania and the Democratic Republic of Congo and has earmarked $350 million for capital projects this year. In Nigeria, the company is building export facilities to boost shipments to West African neighbors. Raising foreign currency in London will enable Dangote to meet capital expenditure needs in other African subsidiaries, according to Abimbola.
Lafarge Africa bought a plant in Calabar, in southeastern Nigeria, that can produce 5 million metric tons of cement a year and is also investing in its South African operation as it seeks to increase capacity to 17.5 million tons from 14 million tons across the continent.
The company expects its leverage ratio, which measures the level of debt incurred by a business against its assets, to drop to between 60 percent and 70 percent over the next 18 months, from more than 100 percent, Mobolaji Balogun, its chairman, said in an interview in Lagos. That will lower the cost of further borrowing for expansion.
Lafarge Africa’s total debt dropped to about $600 million from more than $1 billion after using funds, including the proceeds of the rights offer, to curb liabilities, Balogun said.
In a further indication of growth appetite, both Dangote and Lafarge last year considered a bid for PPC Ltd., South Africa’s market leader, before eventually walking away.
However, raising funds won’t automatically lead to faster growth. LafargeHolcim Chief Executive Officer Jan Jenisch said earlier this month that turning around operations in Africa and the Middle East will be his toughest challenge as he steers Europe’s biggest cement maker through an overhaul. Lafarge Africa reported a loss in 2017, though sees a return to profit this year.
In the companies’ favor are the expectations for economic growth, with Nigeria showing signs of recovery after contracting in 2016 with the economy forecast by the International Monetary Fund to grow 2.1 percent this year. Demand for cement in South Africa is expected to rise, while Ethiopia has been ranked by the IMF as Africa’s fastest-growing economy.
The fundraising will enable Dangote to build on an already solid base and could be a “game changer” for Lafarge Africa, according to Olabisi Ayodeji, equity analyst at Exotix Partners LLP.
(Adds comment from Lafarge Africa chairman in fourth paragraph under the chart.)