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Gas firms’ buyout deal threatens to implode as valuation row boils over

By Wainaina Wambu | March 2nd 2021

Carbacid Chairman Dennis Awori last week argued that the offer was fair and represents a “realistic underlying value of BOC Kenya. [Courtesy]

Like a cornered hunter, BOC Kenya is refusing to go down easily ahead of an impending Sh1.2 billion buyout by Carbacid.

This amid a war of words after BOC made startling claims that the latter undervalued the firm as the hunter becomes the hunted in an ironic twist of fate.

Some 15 years ago, BOC made a takeover bid on Carbacid but failed after a four-year regulatory battle.

A crestfallen BOC would return share certificates it acquired from shareholders of Carbacid.

But Carbacid, in partnership with Aksaya Investments, made a joint Sh1.2 billion bid four months ago to acquire the 100 per cent issued shares of BOC.

The deal, set to birth a giant industrial gas business, appears to have underlying issues ahead of a 30-day offer period that expires on April 6.

BOC is a supplier of industrial, medical and special gases, while Carbacid produces food-grade carbon dioxide that is used in fizzy drinks.

Both firms control the largest market shares in their respective areas. BOC has seen a peak in business, with oxygen currently in high demand in the fight against Covid-19.

Its main products include oxygen, nitrogen and dissolved acetylene, which are used in hospitals.

Last month, the BOC Kenya Board refused to recommend the offer for acceptance by shareholders, citing the opinion of an independent financial adviser. Dyer and Blair put the “fair” value of BOC at Sh91.76 billion, which is 44.5 per cent higher than the offer price.

“As the fair value is below the offer price, the offer price is not considered to be fair and reasonable,” said Dyer and Blair. This has fired up the board and some minority shareholders. The board, however, noted that the offer was not conditional to the conclusion of the deal.

“This means that its success does not depend on the offeror achieving a given level of acceptances,” said the board.

This is because the offerors already have the blessing of BOC Kenya’s majority shareholder, which is the UK-based BOC Holdings with a 65.38 per cent stake. However, Carbacid’s analysis paints the picture of a firm on its knees. Carbacid Chairman Dennis Awori last week argued that the offer was fair and represents a “realistic underlying value of BOC Kenya and one that will allow us to invest in the rejuvenation of the company in coming months”.

“The offer price relies on this valuation method, which is widely accepted as the most authoritative valuation method of the business as a going concern. Ultimately, value is mainly contingent on the cash flows that a business can generate. This notwithstanding, the Offer Price is also consistent with appropriate and genuinely comparable trading multiples of other listed industrial gas companies in Africa, including Carbacid itself,” he said.

The offer is not based on achieving a particular threshold of acceptances, but Awori observed that each BOC Kenya shareholder was free to decide whether to accept the offer on a willing buyer, willing seller basis. 

“We, however, encourage BOCK shareholders to freely and independently decide whether to accept our offer or choose to remain shareholders. We are also actively encouraging the BOCK shareholders to carefully review the terms as per the Offer Document to fully appreciate our rationale in more detail,” said Awori.

Carbacid also did an independent valuation using Faida Investments from 2009 to 2019. The lifting of the suspension of trading of both firms was done in 2009.

The initial takeover bid extended into a protracted legal battle with the Capital Markets Authority that ended up in the High Court, which saw the suspension of the two companies from trading at the Nairobi Securities Exchange (NSE). 

In December 2005, BOC Kenya served a notice of intention to the Carbacid Investment Board to acquire 10.6 million shares of Carbacid at an offer price of Sh144.15 per share, but withdrew the offer in October 2009 after regulatory hurdles.

Carbacid’s independent financial adviser argues that BOC revenues have fallen by 2.7 per cent, while Carbacid has registered at 1.3 per cent growth in revenues since 2009.

“Using a 10 year Compounded Annual Growth Rate (CAGR), BOC’s revenues have declined by 2.7 per cent to Sh975.9 million as of 2019. Carbacid, however, has registered a growth of 1.3 per cent in revenues to Sh630.5 million as of 2019.” 

This is as Carbacid’s market capitalisation has risen by 43.8 per cent to Sh2.2 billion in 2019. Conversely, BOC’s market capitalisation declined by 61.3 per cent to Sh1.1 billion in 2019. 

Dyer and Blair used BOC Kenya’s financials for the period from 2016-2019, financial forecasts for 2021–2023 and land valuation reports. It noted that the Covid-19 pandemic had peaked demand for oxygen – BOC Kenya’s core business - and provided an opportunity for growth. 

“Due to increased demand, this has resulted in the company supplementing local oxygen production with expensive oxygen imports,” said Dyer and Blair.

On the other hand, said Dyer and Blair, Covid-19 had led to a general decrease in purchasing power and impacted customers involved in fabrication, leading to a fall in demand for industrial gases.

The investment bank projected a 11.65 per cent growth in BOC Kenya’s prospects this year, driven by the medical gases segment (oxygen) at eight per cent even as the industrial gases segment falls by six per cent owing to competition, with the remainder of the growth fired up by liquified petroleum gas (LPG) sales and services.

“As a result, net income is projected to grow by 12.43 per cent,” forecast Dyer and Blair.

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