Eagle Cement Corp to buy 100% of a mining company for P3.6 billion

Eagle Cement Corp to buy 100% of a mining company for ?3.6 billion... The acquisition by Eagle Cement Corp [EAGLE 14.56 0.55%], a company owned and controlled by Ramon Ang, of Solid North Mineral Corp (SNMC), a company also owned and controlled by Ramon Ang, is intended to “complement EAGLE’s current operations and future expansions” by giving EAGLE access to SNMC’s supply of raw materials related to the production of cement and other EAGLE products. EAGLE will pay the entire P3.6 billion in cash for 100% of SNMC’s outstanding shares, sourced from EAGLE’s “internally generated cash.”

EAGLE hired BPI Capital to conduct a valuation of SNMC to establish the purchase price. SNMC is referred to as a “sister company” to EAGLE, which means that they are both owned and controlled by the same group of people, in this case, Mr. Ang and his family.

MB BOTTOM-LINE

What’s a few billion between family members? On the surface, this is a pretty boring vertical integration move by EAGLE, where EAGLE is basically buying a supplier that would normally be a separate company, and making it a consolidated part of EAGLE. Companies do this all the time to save money and improve profitability, and to reduce uncertainty by purchasing control of important components to the company’s products.

That probably wasn’t so much of a concern here, though, since both companies were already owned and controlled by the same group. It’s not like SNMC could go rogue and sell all of its supply to Holcim [HLCM 6.30 unch] and leave EAGLE hanging; I mean, it could do that, but if it did, it would have been entirely up to Mr. Ang and his family to have caused that situation.

From reading the news coverage and the disclosure, it isn’t immediately clear what EAGLE minority shareholders have to gain from this transaction. I don’t think it was a waste of money, but there’s probably an argument to be made that EAGLE didn’t need to spend P3.6 billion in cash to buy 100% of a company that it already had practical control over.

Are there better uses for that money that could bring  EAGLE shareholders a better return? Was this just a way for Mr. Ang and his family to take money out of EAGLE without having to pay minority shareholders through a dividend? I don’t know. But these are questions that shareholders and investors should be thinking about whenever they see a related party transaction like this.

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