DIVERSIFIED firm TSL Limited's acquisition of Nampak Zimbabwe (Nampak Zim) comes with a hefty price tag, not just financially, but also in terms of escalating debt risks, which could jeopardise the company's future financial stability, businessdigest heard this week.
According to Nampak South Africa (Nampak SA), TSL will acquire 51,43% of Nampak Zim for US$25 million.
TSL has until June 2025 to settle US$23 million of the total consideration, with the remaining amount to be paid over two years.
The relationship between the two companies is not new, as TSL previously held a 16,53% stake in Nampak Zim until its disposal in 2018.
The transaction, as indicated in recent cautionary statements by TSL and Nampak Zim, stems from Nampak SA's debt challenges over the past decade. To alleviate this debt burden, Nampak SA has resolved to divest several local and regional assets.
However, Morgan & Co has flagged the transaction, citing potential issues with debt if TSL opts for complete debt funding to purchase the business.
“In doing so, TSL's debt will rise above 40% and have a negative impact on the cost and availability of future debt funding,” the securities firm said in its latest market intelligence.
“There is also a risk that TSL fails to materialise the expected synergies from the transaction. This is largely on the back of Nampak's need for additional capex, something that some of its key shareholders have echoed throughout the years.
“Challenges with cultural integration could work against the larger organisation post the acquisition, but TSL's prior relationship with Nampak Zim largely addresses this.”
Since the announcement of the transaction, Nampak Zim’s share price has jumped 16% from ZWG$1,06 per share to ZWG$1,23.
Given a valuation of at least US$41 million, the securities firm expects Nampak Zim's share price to continue rising in the coming weeks, as is typical of price movements in the shares of an acquisition target.
Meanwhile, TSL’s shares have held steady at ZWG$2,80, though Morgan & Co predicts that they may soon appreciate.
“While it is often the case that the acquirer's share price dips after such an announcement, we opine that TSL's share price could appreciate as well,” it said.
“This is premised on the business' potential upside of 40%, which outweighs the negative impact of the 20% controlling premium embedded in the acquisition price.”
TSL mainly provides ancillary services to the agriculture sector and has been in operation since 1957.
Nampak Zim is a packaging company that operates under two main segments, namely printing and converting, and plastics and metals.
The printing and converting segment houses the Hunyani business, which manufactures paper packaging products, corrugated containers, specialised packaging, folding cartons and labels.
Packaging products from this division serve the fast-moving consumer goods (FMCG), pharmaceutical, and agriculture sectors.
The plastics and metals division mainly manufactures plastic moulds and metal cans for various subsectors within the broader FMCG industry.
TSL's purchase of Nampak Zim circles back to the group's effort to provide end-to-end ancillary services to customers in the agricultural and related services, specifically with regards to packaging.