Mounting debt forced SA firm to sell off Nampak Zimbabwe

LIVINGSTONE MARUFU

Packaging group, Nampak Southern Africa Holdings Limited, was forced to sell off its controlling ownership or 51.43% in Nampak Zimbabwe as part of a plan to reduce its crippling debt, it has been established.

The only practical solution to that situation, according to analysts, was to sell assets in other markets, including Zimbabwe.

It has been established that from 2011 to 2014, Nampak Southern Africa Holdings struggled to manage the massive debt that resulted from its legacy expansion in other parts of Africa, particularly in Angola and Nigeria.

As a result, it failed to work properly in Nigeria, leaving the business heavily indebted.

By March 2019, the company’s debt was R7.6bn (US$432.76m), and it used a mix of asset sales and rights offers to in order to clear this debt.

In 2023, Nampak SA initiated and concluded refinancing agreements where it is required to settle the outstanding R2.7bn (US$153.75m) debt by March 31, 2026 through  various assets disposal.

This necessitated the bid to sell a controlling stake of Nampak Zimbabwe for around R438m or US$25m.

In its latest market intelligence report, research firm Morgan & Co said: “The transaction is borne out of Nampak South Africa’s challenges with debt for the better part of the last decade. It is on the back of this that Nampak South Africa resolved to dispose of several assets both locally and regionally in a bid to ease the weight of the debt, and the sale of Nampak Zimbabwe  controlling stake to TSL is the latest disposal to make headlines.”

According to the deal , TSL will purchase 51.43% of Nampak Zimbabwe  for a total consideration of US$25m.

TSL will have until June 2025 to settle US$23m of the total consideration, with the remainder to be paid off over two years thereafter.

The relationship between TSL and Nampak Zimbabwe  is not new considering that TSL once held 16.53% of Nampak Zimbabwe  until disposal in 2018.

According to the report, TSL mainly provides ancillary services to the agriculture sector and has been in operation since 1957.

“The current strategy aims to handle the needs of customers in the agricultural and related sectors throughout the entire value chain process, or more colloquially, from seed to shelf. These services are mainly grouped into three strategic business units namely, agricultural, logistics, and marketplace operations.
The agricultural strategic business unit encompasses packaging operations, production of farming inputs, and farming activities. The logistics unit  deals with the transportation of goods and commodities throughout the value chain, as well as handling of goods within warehouses. The group’s selling floors, and theZimbabwe Mercantile Exchange are the main operations under the marketplace SBU.TSF, Agricura, Propak, and Bak Logistics are some of the group’s key brands,” Morgan & Co said.

On the other hand,  Nampak Zimbabwe is a packaging company that operates under two main segments, namely printing and converting, and  plastics  and  metals.

The printing  and  converting segment houses the Hunyani business which manufactures paper packaging products, corrugated containers, specialised packaging, folding cartons and labels.

Packaging products from this division serve the fast moving consumer goods (FMCG), pharmaceutical,and agriculture sectors.

The plastics  and  metals division mainly manufactures plastic moulds and metal cans for various sub sectors within the broader FMCGindustry.

“TSL’s purchase of Nampak Zimbabwe  circles back to the group’s effort to provide end-to-end ancillary services to customers in the agricultural and related services, specifically with regards to packaging. Packaging is an essential part of the value chain in several sectors, and Nampak’s packaging products are widely used in Zimbabwe, especially in the FMCG sector.

Nampak’s variety of packaging products are relatively more expensive than TSL’s considering that the company currently offers limited solutions on the packaging spectrum through its own brand (Propak).

With this in mind, an expansion of its packaging solutions through acquisitive growth certainly brings TSL closer from being an unparalleled integrated service provider in some of Zimbabwe’s key sectors.

In a bid to interrogate the fairness of the consideration for Nampak, we refer to our valuation of the business. Our valuation methodology uses a combination of objective and relative valuation models, specifically the P/Eand EV/EBITDA multiples approach as well as the Discounted Cashflow method. A Combination of these approaches indicates a fair market capitalisation of US$41m   for Nampak. Nampak South Africa’s 51% stake in NPKZ therefore translates to US$21m and the purchase price of US$25m sounds reasonable aftera control premium of 20% in incorporated,” the report said.

Morgan& Co said every transaction is not without its risks, and the research firm  identifies a few of them with this one.

“We identify possible issues with debt in the case that the business opts to make a purchase of the business completely with debt funding. In doing so, TSL’s debt will rise above 40% and have a negative impact on the cost and availability of future debt funding. There is also a risk that TSL fails to materialise the expected There is also a risk that TSL fails to materialise the expected synergies from the transaction. This is largely on the back of Nampak’s need for additional capex – something that some of its key shareholders have echoed throughout the years.

Lastly, challenges with cultural integration could work against the larger organisation post the acquisition, but TSL’s prior relationship with Nampak largely addresses this,” Morgan& Co said.

Since the announcement of the transaction, Nampak’s share price has jumped 16% from ZWG$1.06 per share to ZWG$1.23 and given a valuation of at least US$41m, analysts  expect Nampak’s share price to continue rising in the coming weeks, as is typical of price movements in the shares of an acquisition target.

“We maintain our buy  call on Nampak,” reads part of the report.

TSL has maintained its current price of ZWG$2.80 per share regardless of the premium.

While it is often the case that the acquirer’s share price dip after such an announcement, analysts opine that TSL’s share price could appreciate as well and this is premised on the business’ potential upside of 40% which outweighs the negative impact of the 20% controlling premium embedded in the acquisition price.