Why Premier Cement is absorbing two sister firms

Infographic: TBS

Facing pressure from investors and analysts, Premier Cement Mills has announced that it will merge its associate company, National Cement Mills, and its power subsidiary, Premier Power Generation, with itself.

At a board meeting on 13 March, the company decided that Premier Cement would remain as the sole entity after the merger, with shares of the two subsidiaries being exchanged for Premier Cement shares, which are already listed on the stock exchange.

Premier Cement has not yet shared the details of how the share exchange will work. The plan will need approval from its shareholders, creditors, regulators, and the high court before it can go ahead.

Md Selim Reza, chief financial officer of Premier Cement, said the merger will help the company work more efficiently by combining resources and operating on a bigger scale.

However, some analysts remain concerned, questioning National Cement's arrangement and suggesting it may disproportionately benefit the company's directors rather than its shareholders.

Premier Cement, however, denies these claims.

Questions faced by Premier Cement

Premier Cement owns 96% of the shares in its power subsidiary. It holds an 18.67% stake in National Cement, while the remaining shares are owned by common directors representing reputed conglomerates – TK Group, GPH Group, and Seacom Group.

Premier Cement's production capacity increased from 2.4 million tonnes to 5.7 million tonnes in mid-2022, while National Cement's capacity grew from 0.42 million tonnes to 2.4 million tonnes.

Analysing the assets and liabilities of both cement makers before and after their simultaneous expansion projects, analysts raised concerns, suspecting a strategic transfer of leverage burden onto the listed firm to benefit the associate company.

"As per the numbers available at the annual reports, Premier Cement spent four times higher than National Cement for every tonne of new capacity," CFA Society Bangladesh President Asif Khan told The Business Standard last week.

According to him, the new capacity leads to an increase in long-term assets as well as long-term liabilities in the case of debt-driven expansion.

The disclosed increase in long-term assets due to the capacity expansion suggests that Premier spent around $45 per tonne of added capacity, said Asif Khan adding that, "This was surprisingly low for National – less than $9 per tonne, considering the 2021-22 exchange rate."

To add per tonne of new capacity, National's term loans rose by less than $3, which rose by more than $18 for Premier.

"Premier's spending per tonne looks slightly higher than industry benchmarks then. However, the company may have an explanation for that," he said.

Premier Cement Chief Financial Officer Md Selim Reza earlier last week, in response to the queries, told TBS that the disproportionate rise in assets and liabilities was due to the higher investment needs for parent company projects.

"From landfilling to civil work, the vast new factory cost us much higher than that in the old National premises," he said, adding that Premier built four gigantic silos that cost over Tk100 crore each.

National Cement also should have at least two such silos for nearly 2 million tonnes added capacity, said Mohammad Imran Khan, a Premier Cement shareholder.

"Apparently, they turned the public company into a centre of higher capital expenses, which also led to a disproportionate increase in its liabilities, dragging profits down every quarter," said the stock investor, who had invested expecting a boost from the expansion.

In the two years after the commencement of the new facilities, Premier Cement incurred finance costs of over Tk238 crore amid the rising borrowing costs, leaving a net loss of Tk84 crore in FY23 followed by a net profit of Tk74 crore only in FY24.

On top of that, in the last three years, it incurred an exchange loss of more than Tk300 crore.

When Premier itself was paying double-digit interest against its bank loans, it let National owe Premier Tk87 crore as of June 2024 and the effective interest charged was less than 6%, said Imran Khan.

"Premier has been aggressive in benefitting the associate company as it cared more about the common directors than the public investors," he added.

Imran Khan demanded a special audit by regulators into the expansion projects as asset-liabilities play an important role in determining exchange ratios in amalgamation schemes.

Like Imran Khan, an asset management company invested heavily in Premier Cement shares and became frustrated later. They raised the questions in an email to the company a few months back and TBS recently obtained a leaked copy of that.

An official of the asset manager earlier last week told TBS that it is a curious case why the company has been continuing the associate-parent structure for more than a decade, especially when National sells cement under the Premier brand.

"The concerns regarding the potential transfer of benefits to a non-listed associate are serious and require serious attention from regulators, especially when common directors own more of the associate stake and less of the listed company stake," said Chartered Accountant Mahmud Hossain, a former vice president of the Institute of Chartered Accountants of Bangladesh.