Arabian Cement, Al Safwa in merger talks

01 November 2017

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 include 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 stakeholder in Arabian Cement (5.27 per cent).

Synergies will be limited to some cost savings but it may not increase 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 tonnes resulting in a market share of 15 per cent, stated Al-Rajhi Capital Research.

Arabian cement has a production capacity of 4.8 million tonnes while Safwa has 4.4 million tonnes, according to 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 tonnes), representing 20 per cent of its last 12- month sales volume, compared to total inventories of 35 million tonnes (72 per cent of last 12-month dispatches) for the sector, it said.

There are also many logistics advantages for the companies 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.

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