According to a notice issued by Karachi Stock Exchange, Bestway Cement has acquired substantial stake in Lafarge Pakistan Cement. This has ended the speculations going on for some time that who would take over the majority stake as well as the management control of Lafarge’s cement unit. This is also likely to end speculative buying in D. G. Khan Cement (DGKC) that was on one the main contender.
According to the details, Sofimo SAS (subsidiary of Lafarge Group), the indirect holder of 75.86% stake in Lafarge Pakistan Cement Limited (LPCL), has sold its stake to Bestway Cement Limited (BWCL) for US$218 million implying a purchase price of PkR19.44/share. The purchase price entails an enterprise value of US$329 million as against the current enterprise value of US$285 million. This would make BWCL the largest manufacturer in Pakistan with an installed capacity to produce 8.3 million tons cement annually.
In Pakistan the listed cement sector has shifted into the red after this news where the market appears to believe that DGKC, having failed to acquire LPCL, will now opt for a greenfield expansion in the South which raises the risk of a price war particularly if Lucky Cement (LUCK) follows suit in expanding in Punjab.
That said, analysts believe any price war will likely occur closer to the time additional capacity comes online while in the medium to longer run, anticipated sharp growth in local cement dispatches could reduce the risk of price wars. The industry can achieve optimum capacity utilization latest by FY18 based in annualized growth in local offtake and export. This should reduce the threat of potential price war till additional capacities become operational.
Should a price war emerges, analysts believe it would be short lived; the last price war lasted for 5-6 months in FY10. During that period, retail cement prices came down by 23% while volumes increased by 16%YoY.
LPCL currently trades at a 15% discount to its acquisition price. While LUCK and DGKC will now be able to focus more on their inherent strengths and to avoid entering into price war that could prove detrimental for smaller units.