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When the Swiss Holcim Group first announced its plans in July to sell the Nairobi listed Bamburi Cement business in Kenya to Amsons Group; it raised fear and left many lingering questions among top industry executives on the future of the cement business in East Africa.
This week, the Swiss cement maker announced another major exit from Nigeria after 65 years. The multinational announced signing an agreement with China’s Huaxin Cement Ltd to sell its entire 83.81% shareholding in Lafarge Africa PLC, at an equity value of USD 1 billion on a 100% basis.
“The transaction is expected to close in 2025, subject to customary and regulatory approvals,” Holcim said in a short statement.
A CEO Magazine independent analysis of the Group’s financial statements and reports reveal that, at the centre of the Group’s major exit from East Africa lies a serious crisis that started way earlier signaling a faltering bottom line in some African markets.
This also includes; tax disputes, legal suits, cut-throat competition from local and regional players; and overall, the change in the Group’s strategy to pursue more sustainable production in light of the energy transition question.
Before the sale, Lafarge Africa was a subsidiary of Holcim Group based on a merger between Lafarge S.A. France and Holcim Limited, Switzerland. The two large global players merged in 2016.
The announcement for the sale of Bamburi came barely three months after the cement manufacturing conglomerate had sold its stake in its two former subsidiaries- Hima Cement Ltd in Uganda and Mbeya Cement in Tanzania.
The transaction for Hima Cement Ltd to the Sarrai Group had an enterprise value of USD 120 million. Holcim also agreed to sell its 65% participation in Mbeya Cement Company Ltd in Tanzania to Amsons Group for an undisclosed sum.
Holcim Group through the Bamburi management decided to sell Hima Cement on November 14th, 2023 and this was approved by shareholders at an Extraordinary General Meeting (EGM) in Nairobi on 14th December 2023.
Martin Kriegner, Holcim’s Regional Head for Asia, Middle East & Africa, described these divestments as a strategy to consolidate the Group’s leadership in core markets as the global leader in innovative and sustainable building solutions.
“With the Sarrai Group and Amsons Group, we are pleased to have found strategic and trusted partners who are best positioned to develop these businesses in the long term,” Kriegner said in a statement.
Holcim Group, in its 2024 half-year report, indicated that it had continued to optimize its portfolio with the divestments of businesses in South Africa, Uganda and Tanzania, which were completed in the first half of 2024.
“…in addition, in July 2024, Holcim signed an agreement to sell its business in Kenya. These developments demonstrate Holcim’s strategic focus on its presence in core markets, enhancing its product offerings as well as committing to sustainability and decarbonization initiatives,” the report reads in part.
A 24th October letter to Bamburi shareholders indicated Amsons made a take-over offer following the Take-Over regulations to purchase all the Bamburi Shares for KES 65 per share upon the terms set out in the Amsons Offer Document, while Savannah Clinker made a competing take-over offer to purchase all the Bamburi Shares for KES 76.55 per share upon the terms set out in the Savannah Clinker Offer document.
The closing date of the Offers is set for 5th December 2024 with the announcement of the results of the Offers set for not later than 20 December 2024. The closing date may be extended with the approval of Kenya’s Capital Markets Authority.
The devil in the detail
The powerful Holcim Group centralised its operations in Nairobi, and spread its tentacles across East Africa, through the Bamburi Cement Company in Kenya as the holding company for other subsidiaries in East Africa such as the Hima Cement Limited in Uganda, and the Mbeya Cement Company in Tanzania, among other smaller subsidiaries.
However, in November 2023, Bamburi Cement issued a profit warning signalling that all was not well with its income statement as the year was coming to a close.
Bamburi Cement, in a statement, told investors and shareholders that based on its preliminary assessment of the 2023 consolidated financial performance of the company, projected earnings for the financial year 2023 were expected to be lower by at least 25 per cent than the net earnings in the financial year 2022.
Dr. John Simba, the Chairman of the Bamburi Board wrote in a statement that, the expected decline in net earnings was attributable to the one-off settlement of outstanding tax liabilities and legal disputes in Hima Cement as part of the closure of the sale transaction thereby impacting the 2023 results.
It is therefore not surprising that by the end of 2023 at the declaration of its financial results, Bamburi had faltered in cementing its position in the market after posting a total annual loss of KES 399 million (USD 3 million) from KES 181 million (1.3 million) profit earnings in the previous year of 2022.
According to a statement from Mohit Kapoor, the Bamburi Group Managing Director, the company had suffered a loss of KES 399 billion (USD 3 million) partly due to the tax and legal liabilities settlement in Uganda, which Hima Cement Limited reported at a loss of KES 1.1 billion (USD 8.4 million).
More troubles at Hima Cement
Hima Cement nestled at the base of Mt Rwenzori in South Western Uganda was established in 1994 after the government privatized the Uganda Cement Industries. Acquired by Lafarge in 1999 as a subsidiary of Bamburi Cement Group in Kenya, making it part of the Holcim Group.
With two plants in Uganda, Hima Plant in Kasese District and Tororo Grinding Station in Tororo District, Hima Cement had a total cement production capacity of 1.7 million tons annually at the time of its sale.
A CEO East Africa Magazine independent analysis of Bamburi’s 2022 report shows, that Hima Cement’s 2022 turnover was higher than the prior year thanks to cement market growth, and price actions to mitigate against increased costs of production. No figures were provided.
However, Hima’s operating profit decreased compared with the prior year largely attributable to [an undisclosed] safety incident in January 2022 at Hima Kasese Plant, which resulted in operational disruption.
Performance was also impacted by the increased landed cost of major raw materials and fuel costs following global supply chain disruptions which resulted in transport cost rate hikes, which in turn increased the distribution costs.
Hima also faced stiff competition in the market with other players such as Simba Cement, and Kampala Cement which chipped away its market share through aggressive marketing and lower prices.
Elsewhere, Bamburi also faced similar competition from key players such as Mombasa Cement, East African Portland, and Savannah Clinker, according to research by Standard Investment Bank.
In the Nigerian market, Holcim’s Lafarge faced competition from the Dangote Group which has developed huge regional capacity in the manufacturing of cement becoming one of the market leaders in the business segment.
Details captured under the Notes section to the Financial Statements for 2022 reveal that Bamburi and its subsidiaries had also been involved in a number of legal proceedings which were yet to be concluded.
Some of the cases included the Court of Appeal Civil Appeal No. 155 of 2011 Uganda – Mining lease. This Appeal arose from Misc. Cause 88 of 2012 in the High Court in which Hima Cement challenged the findings of a judicial review in which East African Gold Sniffing Company Limited (the defendant) reclaimed their exploration licence “0932”in one of the limestone deposit sites in Kasese where Hima Cement operated.
In the event of an adverse ruling, Hima Cement was on the verge of losing its mining lease over the said site, which would have a significant effect on the operations of the entity’s plant in Kasese. The legal costs in respect of this case were estimated at UGX 361 million USD 97,000).
According to the Board of Directors’ evaluation of the case and the legal advice received from the Company’s lawyers, the Directors opined that the appeal had a strong basis with a high likelihood of success. As such, the financial statements of Hima Cement Limited for the year ended 31 December 2022 have been prepared on a going concern basis.
Tax matters
Bamburi in its 2022 report indicated that it was regularly subjected to evaluations, by the taxation authorities, of its direct and indirect taxation affairs and in connection with such reviews.
In the year 2018, the company reached a settlement agreement with the Kenya Revenue Authority within the Alternative Dispute Resolution framework regarding a tax assessment for the 2007 – 2011 period.
A full settlement of the agreed principal tax amounting to KES 332 million relating to corporate tax. The company also paid principal tax for the period 2021 – 2014 amounting to KES 40.6 million ( USD 313,000) relating to corporate tax, withholding tax and Value Added Tax (VAT).
The Bamburi management also applied for a waiver of interest and penalties amounting to KES 288 million (USD 2.2 million) and KES 27.6 million (USD 213,000) for the period 2007 – 2011 and 2021 – 2014 respectively.
However, on the 23rd of February 2022, the company received a letter from the Cabinet Secretary for National Treasury and Planning declining the company’s penalties and interest waiver application amounting to KES 288 million.
“The company will continue to engage the Cabinet Secretary for National Treasury and Planning for a review of the decision to decline our penalties and interest waiver application. The Directors are of the opinion that the Cabinet Secretary for National Treasury and Planning will favorably reconsider his decision and eventually grant a waiver of the penalties and interest and therefore no provision has been made for the amount in the year,” the company wrote in its 2023 financial statements.
Back in Uganda, another tax crisis was boiling. In September 2020, the Uganda Revenue Authority (URA) commenced a review of Hima Cement’s transfer pricing compliance for the financial years 2014 to 2018.
According to a transfer pricing document authored by Cristal Advocates, a Kampala law firm with expertise in tax matters; Uganda’s transfer pricing rules require taxpayers to set prices for transactions with related parties in accordance with the arm’s length standard and to document fully the basis for the prices used.
Where the price charged between related parties is not considered to be equivalent to that which would apply to a similar transaction between unrelated parties operating at arm’s length, transfer pricing rules give tax authorities such as the Uganda Revenue Authority (‘URA’) the power to adjust the tax liabilities of the parties for tax purposes so they are consistent with the arm’s length standard.
In December 2022, URA raised a corporation tax assessment with a principal tax of KES 594 million ( USD 4.5 million) and interest of KES 362 million (USD 2.7 million). The company objected to the raised assessments and submitted a detailed response to the objections team of URA.
As per the Tax Procedural Code Act, URA is required to review the objection application and communicate a decision within 90 days from the date of objection. The objection was submitted on 10th February 2023.
However, by the end of 2023, the tax crisis had sunk Bamburi affecting its bottomline.
Other legal matters
At the global level, Holcim Group also suffered from legal issues with its potential liabilities, or contingencies amounted to CHF 737 million (USD 833 million) in the first half of 2024.
This arose from criminal proceedings in France against Lafarge S.A. related to its legacy operations in Syria during the country’s civil war in 2013 and 2014 are pending with the investigating judges in Paris.
“…Lafarge S.A. continues to cooperate fully with the French judicial authorities,” The Group said in its 2024 half-year report
In December 2022, January, July, December 2023, and February 2024, five civil lawsuits were filed in the U.S. District Court for the Eastern District of New York against Lafarge S.A. by individuals who were injured or killed in terrorist attacks in Syria, Iraq, Libya, Jordan, France, Spain, Turkey, and Niger from 2012 to 2017, or their heirs and family members. Lafarge Cement Holding Limited and Lafarge Cement Syria SA have also been named defendants in all five lawsuits.
“None of the lawsuits have specified the amount of the damages claimed. It is difficult to predict at this early stage the outcome of these matters, including the timing or any possible impact on Lafarge S.A.. There is also a risk that additional plaintiffs will join these lawsuits or commence separate actions based on the same conduct. Lafarge S.A., Lafarge Cement Holding Limited, and Lafarge Cement Syria SA are aggressively defending the actions, the Group said in a statement.
Divestments, Mergers, Acquisitions and Decarbonisation
Beyond tax and legal issues, Holcim’s sale of its businesses in Africa and other major markets points to a bigger plot in the company’s change of business strategy towards environmentally sustainable production in the most attractive markets.
The company faces increasing pressure from investors and shareholders over the energy transition question and adhering to Environmental, Social and Governance (ESG) requirements.
The Group launched its climate policy and net-zero pledge, which is in line with the 2030 and 2050 net-zero targets based on the 1.5°Celsius framework validated by the Science Based Targets Initiative (SBTi), a corporate climate action organisation that enables companies and financial institutions worldwide to play their part in combating the climate crisis.
Jan Jenisch, the Holcim Chairman and CEO who stepped down this year, noted in the 2023 annual report, that in 2021, the company launched “Strategy 2025 – Accelerating Green Growth” and has achieved its financial targets two years ahead of plan.
“Moving our business from volume to value, we have successfully shifted to the most attractive markets as well as businesses with strong growth drivers and margins. We accelerated our leadership in sustainability, making decarbonisation a driver of profitable growth,” he says.
Through a disciplined Mergers and Acquisition approach, Holcim has delivered 97 value-accretive transactions since 2018, with six major acquisitions in solutions and products, 72 bolt-on acquisitions mainly in Europe and North America, and 19 divestments including on the African continent, Russia, India, Indonesia, Brazil and Malaysia.
A speech delivered by Miljan Gutovic, the new Chief Executive Officer at the Group’s Annual General Meeting in June revealed how the Group acquired Sivyer Logistics, a leading producer of construction demolition materials in London, Europe’s largest urban mine where tens of millions of tons of construction and demolition materials are generated.
“By recycling these valuable resources we can reduce our dependence on primary materials. Thanks to our advanced technologies, recycled construction demolition materials can be used in everything from cement and ready-mix to aggregates,” Mr Gutovic explained.
Holcim now has 135 recycling centres globally, and projects 20% growth in recycled construction demolition materials this year to reach 10 million tons with its ECOCycle circular technology platform.
“In Q1, 2024, ECOPact reached 26% of net sales in ready-mix and ECOPlanet accounted for 26% of net sales in cement,” he said.
Holcim also acquired the iconic roofing brand Duro-Last in the U.S. to FDT from the iconic roofing brand Duro-Last in the U.S. to FDT Flachdach Technologie in Germany, becoming a global leader in advanced roofing and insulation systems. in Germany.
The company has also observed fast-paced growth in the most attractive markets, increasing its share of net sales in mature markets from 55 per cent in 2018 to 78 per cent in 2023.
In North America, where the Group is aggressively expanding, it almost doubled net sales from USD 6 billion to more than USD 11 billion in three years. The region now represents 39 per cent of the total net sales. The Group has final plans to list its North American business.
“ As a standalone entity, our North American business is ideally positioned to play a key role in the region’s reindustrialization, accelerated by infrastructure investments – from data centers enabling the AI economy and logistics platforms for e-commerce, to battery factories supporting the transition to electric vehicles,” Mr Jenisch says.
Nollaig Forrest, the Group’s Chief Sustainability Officer, in a statement, notes that by making net-zero cement a reality, the company aims to deliver eight million tons of fully decarbonised cement per annum by 2030.
“We owe this breakthrough to six carbon capture, utilization and storage (CCUS) projects that we are executing, to capture five million tons of CO2 per annum by 2030. Expanding our low-carbon formulation, we advanced the use of innovative raw materials like calcined clay, which reduces the carbon footprint of cement by up to 50 percent, from Europe to Latin America,” Ms Forrest says.
The six projects in execution have also been selected for grants from the European Union (EU) Innovation Fund.
The Group’s decarbonisation approach
The Group notes that its scope 1 emissions account for 59 per cent of its footprint most of which come from cement production while 39 per cent of its emissions are generated by the raw materials used in the production of clinker. Fuel combustion necessary to heat cement kilns is another significant emissions source.
The Group’s scope 2 emissions account for four per cent of its carbon footprint and includes direct emissions from the generation of purchased electricity consumed in the company’s owned or controlled equipment, while scope 3 includes all other indirect emissions generated in the value chain, such as for transportation and the extraction and production of purchased materials and fuels.
As the Group moves to more carbon-efficient construction, its approach in reducing emissions at each stage means increasing the share of decarbonized electricity by leveraging power purchase agreements and onsite renewable electricity, together with decarbonization of the electrical grid
Replacing clinker in the final cement products with other mineral components, such as calcined clay and novel binders, increases energy efficiency and transitioning to alternative fuels.
Group risk
Holcim also recognises the fact of risk in changing its business strategy. For instance, the company notes in its climate report how demand for building materials can be fundamentally driven by economic growth (or contraction) in a given territory.
The Group notes, “These changes in underlying demand may impact sales volumes, prices and/or industry structure as many markets are facing long-lasting inflationary pressures coupled with high interest rates that may plague the construction sector.”
In this context, the development of new products including low-carbon products with a higher added value and a higher price is impaired or slowed down.
“Our growth strategy in mature markets such as Europe and North America, while sharpening our footprint with selective divestments in emerging markets, reduces the Group’s exposure to markets where economic growth is more volatile. Aligned with our strategy of moving from volume to value, responsible pricing ensures the profitability of our business is maintained.”
In response to the CEO Magazine inquiry on why the Group had discontinued some operations in Africa, Livio Brandenberg, Holcim Group Media Relations Manager said, that Holcim is pursuing a growth strategy as the global leader in innovative and sustainable building solutions.
“In this context the company is constantly evaluating opportunities to align its portfolio with this vision and open new growth opportunities for the company.”