Caribbean Cement royalty proposal spooks the market

Caribbean Cement Company shareholders will indicate in three weeks on whether they approve of a plan to start paying royalties to ultimate parent, international construction company Cemex, for the use of its trademarks and other intellectual property.

The Cemex/CCCL master agreement specifies payments of up to four per cent of revenue, which, based on the company’s turnover last year, would amount to $800 million — or potentially more since the cement producer appears set to attain a new record year in sales revenue this period.

Caribbean Cement’s annualised revenue for 2021 is estimated at nearly $24 billion, based on its nine-month inflows of $17.8 billion up to September; whereas last year, its annual revenue amounted to $20.1 billion.

Cemex has already struck a similar agreement with Caribbean Cement’s direct parent company, Trinidad Cement Limited, TCL, and the approval for the Jamaican arrangement is likely a done deal, given that Cemex ultimately controls nearly 80 per cent of Caribbean Cement’s voting rights.

That Cemex would seek a similar arrangement with CCCL was seen as highly probable after the TCL master service agreement was disclosed and later approved in Trinidad in September, but Jamaican stock market investors still reacted to the news by selling down the stock in early trading on Thursday, when traders became aware of the pending vote, which was disclosed among the resolutions to be approved at Caribbean Cement’s annual general meeting on December 7.

The CCC stock typically trades in thousands of units on a daily basis but by the end of the trading day on Thursday, Caribbean Cement shares had lost more than $16 or nearly 16 per cent of value on volumes that topped 1.18 million units.

The cement stock settled at $86.88, valuing the company at $73.9 billion, having lost nearly $14 billion of value in a single day.

“We are crunching the numbers now to see what kind of hit we will take. But how is Carib Cement going to assuage investors that they can receive some level of dividend going forward with this royalty proposal,” said an investment house CEO.

His and other brokerages are already conducting analysis of the royalty proposal, and few were willing to speak on the issue without more details.

“Minority shareholders are not happy,” the CEO added.

“Four per cent of sales or profit?” asked a surprised senior broker at another investment house. “I need to go read up.”

Requests for comment from the Rockfort, Kingston-based cement producer, regarding the likely impact of the agreement’s effect on its cement pricing policy going forward and other issues, were denied. Managing Director Yago Castro politely declined, after receiving legal advice.

Dividend payments

It’s also unclear whether the arrangement will affect the deliberations regarding resumption of dividend payments by Caribbean Cement, which last made a distribution to shareholders in 2005, of $59.6 million or seven cents per share, and is plotting a comeback.

“I’m not surprised with this provision for royalties, because for years the foreign parent company has constructed agreements at the expense of the Jamaican company,” said businessman Mark Hart, who holds a stake in Buying House Cement Limited, a cement importer which competes against Caribbean Cement.

“It’s best to have affordable cement in good supply — not protect a producer of a critical input, and foreign owned at that,” he said. Buying House is itself foreign owned by Domicem in the Dominican Republic. It distributes cement from its local base in Montego Bay, based on a quota assigned by the Jamaican Government.

The master services and intellectual property agreement with Cemex and its affiliated companies proposes to “establish” a general framework for the corporate services provided by Cemex to Caribbean Cement, as well as “royalties for the use of trademarks, names, and intellectual property owned by Cemex and licensed to CCCL” for a fee to be determined, but that would “not on an aggregate basis, exceed 4.0 per cent of CCCL’s consolidated net sales,” as laid out in the notice of the annual meeting.

The agreement will assure payouts to Cemex, the majority owner, while questions remain about whether Caribbean Cement will pay returns in the form of dividends to minority shareholders.

Those with minority interest have previously been riled by a previous arrangement that was in force prior to Cemex’s takeover of TCL and Caribbean Cement.

The Jamaican company paid over large sums as operating lease to Trinidad Cement, which had backed a massive expansion of the Rockfort plant. Under that financing arrangement, TCL held the Jamaican asset and leased it to Caribbean Cement, but both were burdened with debt and losses, which eventually led to a restructuring of TCL that paved the way for Cemex to increase its holdings.

In March 2018, Caribbean Cement signed a memorandum of understanding with TCL, agreeing to terminate the operating lease agreement, leading to a turnaround in profit at the Jamaican company.

“There are a few activist minority owners that bought shares and then got the changes [to terminate the lease arrangement], which resulted in the profitability they are now enjoying. But Cemex will try to edge up their returns,” Hart said.

Local brokerage Mayberry Investments Limited played a key role in publicly laying out the case for the termination of the lease arrangement in 2018, but it was shareholder Michael Subratie who initially raised the issue publicly in 2015, arguing then that the operating lease robbed the cement company of value.

business@gleanerjm.com