Sherine Abdel-Razek explores the rationale behind OCI's divestment of its fast growing cement group Orascom Construction Industries (OCI) is a major regional construction group, and its cement Line Of Business (LOB) is also flourishing. So much so that the world's largest cement producer, Lafarge, approached OCI to buy LOB for a whopping $14.9 billion. According to the agreement signed last week, OCI will sell at $12.9 billion in cash in addition to Lafarge's assumption of OCI's debt of almost $2 billion. The transaction is conditional on approval by both OCI and Lafarge shareholders, which will be sought at meetings in January. The divestment is expected to be completed during January, 2008. OCI's Cement Group includes stakes in 14 companies working in the production of cement, aggregates, ready-mix concrete and cement bags. This comprises plants in Egypt, Algeria, northern Iraq, Pakistan, UAE, Turkey and Spain, with a combined annual production capacity of almost 35 million tonnes. New investments in Nigeria, Saudi Arabia, Syria, North Korea and South Africa will increase this capacity to 45 million tonnes by 2010. According to an OCI statement, the deal came after OCI's management recognised that the strategic objectives of the construction and cement groups would be better served as part of separate, focussed businesses. It explained that the Cement Group operates in a consolidating industry that will require significant investment to continue its growth profile. Meanwhile, OCI's board believes that its construction, infrastructure and natural gas operations offer unprecedented opportunities for investment and growth. "Given these competing demands on capital and management resources, the board has concluded that OCI will deliver superior growth and value to shareholders by focussing all its resources on developing its construction, infrastructure and natural gas operations and divesting its cement business," asserted the statement. An EFG note on the sale agreed. It noted that for OCI to sustain the cement LOB's healthy growth rate -- which made it one of the top 10 global producers -- it would have to consolidate its activities in the Middle East and North Africa region. It also needs to develop a solid presence and strategic partnerships in developed markets which require extensive investments. The deal seems to be a win/win for all involved. Some $2 billion of sale proceeds will be invested in different OCI LOBs. OCI is currently one of the region's largest manufacturers of fabricated steel products, and has strategic investments in natural gas industries including stakes in a greenfield ammonia plant in Egypt, an operating urea plant in Egypt and an ammonia/urea complex in Algeria. These projects have a combined annual production capacity of approximately four million tonnes. OCI also invests in infrastructure concessions where it believes it can combine the roles of contractor and developer. As a result, in addition to construction work, this provides the opportunity to generate steady cash flow streams and exceptional value for shareholders. Moreover, OCI's shareholder gains are exceptionally good. In fact, the company's Board of Directors plans to distribute approximately $11 billion of sale proceeds to shareholders in the form of two extraordinary dividends, implying a total dividend value per share of LE300.6. The extraordinary dividend instalments are expected to be paid during the first quarter of 2008. HC Securities highlighted another benefit of the deal, namely Lafarge's assumption of $2 billion in OCI debts which reduces the company's total debt figure of $3.020 billion at the end of September to $1.02 billion. The reduction of the debt translates into better share value that would give, according to EFG calculations, the share an upside potential of 90 per cent after executing the deal and the distribution of the extraordinary dividends. Other OCI's activities will also share in the good windfall. EFG expects the group to expand natural gas-based industries, leveraging on the expected long cycle of consumption growth together with the expected decline in Western capacity due to the rise in natural gas prices. OCI's natural gas LOB has an absolute global cost advantage that allows for high and sustainable export opportunities. This comes on the back of its significantly low natural gas prices, relatively low labour costs and a favourable location near the deficit markets of the West. As a part of the deal, NNS Holding, a family investment holding company controlled by OCI's Chief Executive Officer Nassef Sawiris, will partially contribute to the financing of the deal by subscribing in a capital increase for 22.5 million new shares in Lafarge. This will make it one of the largest shareholders in Lafarge, with an 11.4 per cent stake. Accordingly, Sawiris will become a member of the Lafarge board of directors and will continue to chair the Egyptian Cement Company as well as other key Cement Group subsidiaries.
