BUILDING: A Steep Price To Enter Cape Market
Recent Western Cape Business News
UP-and-coming building supplies conglomerate WG Wearne appears to have paid a rather steep price to break into the Western Cape market. In April 2008 Wearne made its move into the Western Cape with the R123 million acquisition of Durbanville-based Portland Holdings. Wearne paid an additional R40 million for a property – defined as portion 8 of Farm 1098 Hooggekraal - as well as a commitment to acquire (for R60 million) a newly started company called Portland Hollowcare Slabs.
Portland is a well established Durbanville-based business that supplies ready mixed concrete and aggregate as well as road building material to the construction industry.
At the time of the transaction Wearne was essentially a ready mixed concrete and aggregate supplier that operated mainly in Gauteng, the Free State, North West, Limpopo Provinces and KwaZulu-Natal. Portland, which focuses mainly on the Western Cape market, looked a natural geographic extension for Wearne.
Portland also expanded Wearne’s product and services offering, diversified revenue streams and added critical mass (which is important, remembering that Wearne was then one of the newly listed darlings on the JSE’s AltX board).
At that point the Portland deal looked quite inspirational. Portland was a stand-alone and self-sufficient business with experienced management. The business also enjoyed trading margins that (at the time) were considerably higher than Wearne’s trading margins.
And it was not as if the executives at Portland were bailing out with large bags of cash in tow. No, Portland’s owner-executives were joining Wearne as significant shareholders by virtue of the fact that an issue of new Wearne shares settled most of the deal.
The main portion of the Portland deal was settled by the issuing of new Wearne shares at 350c/share – which at the time (considering the buoyant sentiment for construction aligned stocks) seemed very reasonable.
The terms of the Portland deal, however, no longer look that reasonable with Wearne finishing its financial year to end February R5 million in the red at pre-tax level.
Directors described the trading period as ‘one of the most challenging years experienced in the ninety nine year history of the group’. Primarily the rising interest rate environment and subsequent collapse of the residential market severely affected demand for building materials especially in Gauteng and the Western Cape. While the specific performance of Portland cannot be gauged from the segmental reviews in Wearne’s results, CBN suspects Portland found the going fairly tough.
The segmental report reflected a 12% increase in revenue for the Ready Mixed Concrete division but a reduction in gross margins to 16%.
The Aggregate division showed an increase in revenue of 24% - which can be largely attributed to the acquisition of the Portland quarry. But there was a huge squeeze on margins to 21% due to lack of demand and a more aggressive pricing strategy.
Portland’s hollow core slab factory in Cape Town only began sales of its products in March 2009 – but Wearne directors believe that prospects for this factory are promising due the niche market it serves.
In reviewing Wearne’s performance it is difficult to justify the purchase price paid for Portland – although such deals should be looked at with a longer term horizon. As things stand Wearne’s market value of roughly R100 million is less than the purchase price paid for Portland. With that in mind one can only wonder how the Portland vendors – ie executive management – are feeling with the Wearne share trawling at under 60c on the JSE. That’s quite a paper loss from the 350c/share settlement price…and the kind of value wipe-out that can easily de-motivate a management team that needs to grind through another demand dampening Cape winter.
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