What to know about Dangote’s merger of food businesses

Dangote Sugar Refinery Plc, on July 31, revealed its plan to merge with NASCON and Dangote Rice Limited (DRL).

Merger plan fuels buy-side activities

Following this disclosure, the shares of Dangote Sugar Refinery and NASCON have seen improved buy activities, helping to push the market to record year-to-date.

Since the announcement of the proposed merger, the share prices of Dangote Sugar Refinery and NASCON have rallied significantly this year in excess of 300 percent and 400 percent respectively.

On Tuesday, the share price of Dangote Sugar Refinery was N70, up 336.1 percent so far this year, while that of NASCON at N61 has risen by 449.5 percent. Both stocks currently trade at their 52-week highs.

Read also: Stocks gain N411bn as investors buy Dangote Sugar, Nascon, others

What will each shareholder likely receive?

Within this scheme framework, each shareholder of NASCON will receive eleven (11) fully paid-up ordinary shares, valued at 50kobo each, in Dangote Sugar Refinery for every twelve (12) NASCON shares with the same value.

This translates into the issuance of an aggregate of 2,428,651,847 new ordinary shares in Dangote Sugar Refinery. Similarly, for one (1) ordinary share
worth N1 held in DRL, shareholders will receive fourteen (14) fully paid-up ordinary shares, each valued at 50 Kobo, in Dangote Sugar Refinery. This allocation results in the issuance of a total of 2,775,792,508 new ordinary shares in Dangote Sugar Refinery.

So, if someone owned 10,000 units of NASCON before the merger, they will hold approximately 9,167 units after the merger.
This calculation is based on a conversion ratio of 11/12, according to Temiloluwa Oyenuga, an analyst at Meristem in a recent note.

“Similarly, an individual who possesses 10,000 units of DRL will see their holdings increase to 140,000 units (based on a conversion ratio of 14/1) following the merger,” the analyst added.

“A significant competitor in the industry, BUA Foods, presently holds an outstanding share count of 18 billion, a mere 3.74 percent larger than that of the proposed new entity (most likely to be named Dangote Foods),” the analyst added. At N185 per share as at Tuesday, September 5, BUA Foods has risen this year by 184.6 percent.

Read also: Dangote Cement, Nascon, other laggards push market further south

SEC and shareholders will give their approvals…

Following the merger announcement, Dangote Sugar Refinery presented the intended consideration to be extended to NASCON and DRL shareholders as part of the scheme.
Expectedly, the listed companies will apply to the Securities and Exchange Commission (SEC) for approval and subsequently the Federal High Court to proceed with the consolidation of the merger agreement.

Will the merger benefit NASCON shareholders?

“It is important to note that the merger, if successful, may lead to a dilution effect for Dangote Sugar Refinery shareholders. The additional issue could potentially serve as compensation for the existing shareholders of Dangote Sugar Refinery.

“Considering that the merger terms directly appear not to be beneficial to NASCON shareholders especially looking at the stocks’ prices as at the announcement date, the price at which Dangote Foods will be listed becomes an important variable to check the offer’s attractiveness,” the Meristem analyst added.

According to the analyst, “Our analysis shows that a price of N61.15 for Dangote Sugar Refinery will put NASCON’s shareholders
indifferent between the two stocks. However, we emphasise that substantial compensation for both Dangote Sugar Refinery and NASCON shareholders will largely hinge on a higher listing price.

“Thus, our thought is that the listing price would fall within the range of N60 to N70. Our thought is guided by the need to strike a balance between making the listing price of Dangote Foods (upon listing) attractive to new investors and providing adequate
compensation for potential dilution faced by current Dangote Sugar Refinery shareholders,” Oyenuga said.

When is the merger likely to be concluded?

“We anticipate that this process will likely take till Q2:2024 to be concluded, in alignment with the timeline outlined by the SEC for the pre-approval procedure of mergers and acquisitions,” the Meristem analyst added.