Arabian Cement said it has entered into potential merger talks with Al Safwa Cement, a key Saudi-based firm owned by El Khayyat Group, Public Pension Authority (PPA) and General Organisation for Social Insurance (Gosi).
The rationale for the merger are the locational advantage of their manufacturing facilities and source of raw materials, cost savings in SG&A (selling, general and administrative expenses), common ownership, relatively lean inventories and overall weak demand environment, according to Al-Rajhi Capital Research.
One of the owners of Al Safwa, PPA is also a stake holder in Arabian Cement (5.27 per cent).
Synergies will be limited to some cost savings but not increase in market share or pricing power. If successful, we would not be surprised to see more merger announcements of plants operating in the same region, said the report.
If the merger goes through, it will result in a combined cement production capacity of 9.2 million tons resulting in a market share of 15 per cent, stated Al-Rajhi Capital Research.
Arabian cement has a production capacity of 4.8 million tons while Safwa has 4.4 based on Al Rajhi data.
One of the key distinguishing factors for Arabian Cement is that it has a relatively low level of inventory (0.7 million tons), representing 20 per cent of its last 12- month sales volume, compared to total inventories of 35 million tons (72 per cent of last 12-month dispatches) for the sector.
Also there are many logistics advantages as manufacturing plants of both producers are located in the Western region and the raw material is sourced from the same areas, stated the report by Al Rajhi.
This merger will be helpful in cutting costs in areas such as raw materials consumption, maintenance, transportation, logistics and SG&A expenses, it added.-TradeArabia News Service