An empowerment consortium led by former justice minister Penuell Maduna is poised to take a R2,5-billion stake in Uhambo, the fuel refining and retail giant that will be created if Sasol’s fuel business is permitted to merge with Engen.
Worldwide Africa Investment Holdings, owned by MTN CEO Phutuma Nhleko, SAA CEO Khaya Ngqula and entrepreneur Max Maisela, along with Standard Bank, Sanlam and Old Mutual, is in line for a similar amount.
Maduna is expected shortly to announce the structure of his Tshwarino consortium. No details are yet available, but it includes Jomo Sono and other former principals in Exel, like Maurice Radebe, who swapped their shares in the small empowerment retailer for 10% of Sasol’s local fuel business.
Sasol and Engen will each take 37,5% of Uhambo, with Worldwide and Tshwarino each in line for 12,5%. Coastal refiners like Shell and BP, who compete with both Engen and Sasol, believe the deal will create a dominant, vertically integrated, player that could abuse its virtual monopoly on the supply of fuel to the Highveld, and they are asking the Competition Tribunal to block the merger.
No value has been put on the deal by either Engen or Sasol, and according to Thompson Financial, which aggregates data on mergers and acquisitions, the transaction advisers Dresdener Kleinwort Wasserstein have not provided a value for the all-paper deal. But it is possible to arrive at an estimate based on figures in the public domain.
According to the statement that went out when the deal was first announced, Uhambo would have had pro-forma profits of R1,2-billion had it been operating during the 2003/04 financial year. At a middling price-to-earning ratio of 12:1, those figures suggest Uhambo might be worth R14,4-billion.
That figure is far too low, analysts suggest. The industry’s profits fell sharply during 2003, before returning to a trend of steady growth last year. The South African Petroleum Industry Association has yet to provide retail and refinery profit figures for 2004, but an industry insider familiar with the figures said the industry aggregate had reached about R5-billion.
Uhambo will effectively control 33% of all retail sales, and 50% of refining capacity, but with Sasol’s most prized asset, the Secunda refinery, effectively ring-fenced out of the deal, it isn’t clear exactly how to value Uhambo’s preferential access to Sasol product at the refinery gate.
“You could say conservatively that the merged company will account for a third of all retail and refining profits,” said one independent industry source familiar with the deal and the structure of the local market.
If that is the case, then in a more normal year, Uhambo would conservatively have made closer to R1,7-billion and be worth R20-billion given a price- to-earning ratio of 12:1.
That also accords more closely with the range of figures provided by sources close to the deal, who argue that Sasol alone is bringing R9- to R14-billion worth of assets into Uhambo.
The financing arrangements for the deal have not been disclosed, but it seems likely Worldwide will exchange its Engen shares for Uhambo shares, and some Tshwarino participants will be able to do the same with their Sasol stake.
Engen is 80% owned by Malaysian state oil giant Petronas, and 20% by Worldwide, neither of which makes public the market value of it holdings. But based on a similar analysis of its reach in the retail market, where it controls 1 300 service stations, and its share in refining, industry analysts estimate its value at about R10-billion.
The relative contributions of Sasol and Engen, however, are the source of much of the controversy surrounding the deal.
“Engen brings 1 300 service stations, and a refinery to the table, Sasol brings half of the Natref plant, and maybe 300 service stations, so the assumption is that it is offering a special deal on Sasol product at the factory gate, otherwise it is offering way less,” says an independent observer, echoing the concerns of coastal refiners like Shell and BP, who are trying to block the deal on competition grounds.
If the merger is to be create value for both Engen and Sasol shareholders, the combination of privileged access to Sasol’s refinery product and Engen’s large retail network is critical. But opponents argue that a special price on Secunda’s products — which account for most of the Highveld’s fuel needs — is anti-competitive and illegal.
In its conditional approval of the merger, the Competition Commission has already ruled that Sasol may not offer Uhambo a better price than its competitors, nor may it supply Uhambo preferentially in the event of shortages, at least until a new pipeline from Durban to Gauteng makes it possible for coastal refiners to get their own product to inland service stations.