Tue | Sep 22, 2020

Financial offer for TCL shares not fair, says Ernst & Young

Published:Monday | January 2, 2017 | 12:00 AMSteven Jackson
In ths February 2013 photo, Cemex Jamaica's Rafael Villalona (left) plays host to Dr Morais Guy at the launch of Cemex's Jamaican coorporate office at the Courtleigh Corporate Centre, New Kingston.
Caribbean Cement Company's Rockfort plant in Kingston. Trinidad Cement Limited is the parent company.

Auditors Ernst & Young (EY) has described as not fair the offer by Mexican-based CEMEX to acquire additional shares in Trinidad Cement Limited (TCL) at TT$4.50 each.

The rejection by TCL directors was previously known by Christmas Day last year, but not the auditors' position. The directors have advised shareholders to read the assessment by EY prior to making a decision to sell or hold their shares.

"It is our opinion as of the date hereof that the offer is not fair, from a financial point of view, to the shareholders of TCL," according to the fairness opinion review signed by Zack Nadur, director at EY, and found within the appendix of the TCL circular.

The decision to accept or reject the offer affects TCL group's 10 directors and/or senior managers listed in the circular because they all hold shares directly or indirectly in the group. Director Ruben McSween indirectly holds the highest with 44.6 million units, followed by chairman Wilfred Espinet who directly holds 10.28 million units.

"[EY] reviewed a range of economic, investment, stock market trading and acquisition transaction data in the process of developing factors and rates of return relevant to formulating a view with regard to the fairness of the offer price," stated the appendix report.

On December 5, 2016 CEMEX, the largest shareholder in TCL, announced plans through its subsidiary Sierra Trading to increase ownership in TCL from approximately 39.5 per cent to 74.9 per cent. Full acceptance of the offer would result in a cash payment by Sierra Trading of approximately TT$597 million (US$89 million). The offer price at TT$4.50 (one TT dollar =US$0.16 cents) per share represented a premium of 33.1 per cent over the December 1, 2016 closing price of TCL's shares on the Trinidad and Tobago Stock Exchange. In the past, regional takeover bids have offered shareholders multiples of the existing trading price.


Fairness report


Notwithstanding, TCL commissioned EY to do a fairness report on December. 9, 2016. The EY review included analysis of TCL structure and markets; TCL's published financials; its cash flow forecasts between 2017 and 2021; TCL's prospects, initiatives and risks between 2018 to 2021; potential non-operating and redundant assets; and its return on investment.

"[EY]conducted market-based valuation sensitivity analyses by estimating TCL group's sustainable earnings before income tax depreciation and amortisation (EBITDA) and applying trading multiples for guidelines for publicly traded companies and transaction multiples selected from a review of acquisitions in TCL's industry," stated EY.

The appendix did not disclose the cash flow forecasts or stock price projections. EY, however, indicated that its opinion estimated sustainable EBITDA, while adjusting for revenues and expenses to levels that were reasonable while considering the impact of non-recurring events.

Its proviso included getting all its financial information from public sources and from TCL for the purpose of developing a fairness opinion.

"The fairness opinion is conditional upon the completeness and accuracy of such information," stated EY.


Value analysis


In January 2015, auditors PricewaterhouseCoopers was commissioned by the TCL board to carry out a fair market valuation analysis of its shares for a proposed rights issue which took place in March 2015. The value analysis placed the share value between a low of TT$3.30 and a high of TT$3.80.

"The valuation analysis took into account the company's discounted cash flow, EBITDA, net asset value, market history and considerations and the trading history of the shares," stated the TCL circular.

As at September 2016, TCL group reported EBITDA of some US$77 million over the the prior 12 months, net debt of approximately US$113 million, representing a net financial leverage of approximately 1.5 times. CEMEX has yet to respond to the TCL directors recommendation for shareholders to reject the latest offere.

"This offer represents a clear sign of our commitment to TCL and the region. In addition, although we believe that our offer is attractive given the premium to the current share price, as part of this commitment it is also important to us that TCL remains a listed company so that local investors can continue to benefit from the development of TCL in the future," said Fernando Gonzalez, CEO of CEMEX in the offer notice released December 5. "We look forward to continuing our strong relationship with TCL."

CEMEX is a 110-year-old global building-materials company based in Mexico.