BOC targets Carbacid’s carbon business after takeover bid flop

Industrial gas manufacturer BOC Kenya plans to enter the carbon dioxide (C02) market, setting the stage for a bruising battle against rival Carbacid Investment — the sole operator in the lucrative business.

The move comes after BOC withdrew from a botched-up four-year takeover bid of Carbacid that ended up in court after it was rejected by the Capital Markets Authority.

BOC had hoped to use the buyout to enter the carbon dioxide market where Carbacid has enjoyed more than three decades monopoly.

In targeting Carbacid, BOC had wanted to avoid a market share battle with a seasoned rival and to benefit from the carbon dioxide manufacturer’s expertise in the business.

Now, BOC has set in motions plans to start a carbon dioxide business from scratch that will put it on the road to a head-to-head competition with Carbacid.

BOC’s managing director John Kariuki told the Business Daily that the firm plans to use the Sh400 million it had set aside for the acquisition deal to set up its own carbon dioxide operations.

“What is critical now is how to enter the Carbon dioxide market,” he said, adding that BOC will invest part of the money in improvement of its production processes as its plots its foray into the carbon dioxide market.

Carbon dioxide is used as a preservative in the manufacture of beer, wine and fizzy drinks, and has been the main driver of Carbacid’s stellar revenue growth that saw the firm’s after tax profit more double from Sh113 million in 2005 to Sh256 million in 2009.

Carbacid’s revenues also doubled during the period from Sh271 million to Sh552 million.

Analyst said robust growth in demand from beverage makers across the Eastern Africa could see the firm’s revenues cross the Sh1 billion turnover mark in less than five years.

Contrasting fortunes for the larger BOC – a subsidiary of Germany’s Linde Group - has however seen the firm record single digit growth over the period-—a pointing to maturity of the market for its flagship products including industrial, medical and welding gases.

BOC’s turnover grew from Sh987 million in 2005 to Sh1.2 billion in 2008 while its profits grew marginally from Sh291 million to Sh295 million in the same period.

The trends, analysts say, is the reason BOC is determined to enter the Carbon dioxide market where it has hopes for renewed double digit profits growth and steady dividend payout to its shareholders.

Some market insiders however warned that BOC may find the going tough as it seeks to grab a stake off Carbacid’s 95 per cent share of the carbon dioxide market.

A common thread for both BOC and Carbacid is the relatively out sized dividend payouts that both firms have dished out to shareholders over the past five years, which have soothed investors despite the suspension of their shares at the Nairobi Stock Exchange (NSE) since December 2005.

Last year for instance, BOC paid out a dividend of Sh6.80 for its full year ending December 2008 while Carbacid announced a proposed dividend of Sh10 and a special dividend of Sh5 per share.

However, opinion is divided on whether the twin firms especially Carbacid will be able to maintain the generous dividend payout in cutthroat market place pitting the twin firms against each other.

Some financial analysts reckon that the entry of BOC into the carbon dioxide is likely to slow down Carbacid profit and dividend momentum in a market share that is likely to reminiscent that market share war between East Africa Breweries Limited and South Africa’s Castle Breweries, which had made an entry into the Kenyan market in the late 1990’s before bowing out in 2002 under EABL’s onslaught.

But they expect BOC to grow its earnings since Carbacid has not announced plans to enter its market.

Other analysts reckon that the huge growth opportunities in the carbon dioxide market driven by increased demand from the beverage makers would be big enough to accommodate both firms.

“The market for carbonated drinks is growing and doing very well and BOC are in order to try and get a piece of the Co2 market,” says Rogers Kinoti, investment manager, ICEA Asset Management Company.

“Dividends could slow down if either firms make huge capital investment to grow their businesses.”

Fears over a possible drop in dividend payment comes at a time when investors are anxious to see whether the shares will be able to shrug off the market erosion when it opens for trading.

Though shareholders in suspended companies have missed out on the stock market rally that peaked in 2007, some analysts say they have been the biggest winners in the downturn.

This is because they have been able to preserve their wealth at a time when stock prices have been plummeting in a bear market that has persisted for nearly two years.

At the time of suspension, BOC shares were trading at Sh160 a share while Carbacid ones were trading at Sh137 a piece.

This is not the first time BOC will be attempting to venture into the Co2 business. It is after an unsuccessful attempt to manufacture and sell Co2 before it opted instead to acquire a stake in Carbacid.

In Co2 business that’s primarily dependent on strong ties and allegiances, BOC found that clinching contracts from both East Africa Breweries Ltd and Coca Cola which are among the largest buyers of Co2 was a tall order.

It is while as chairman of East Africa Breweries Ltd that former majority shareholder in Carbacid, Kenneth Matiba through a family held holdings company Alliance Nominees acquired a 22 per cent stake in the CO2 manufacturer cementing the ties between the two firms.

The stake was in May sold to listed private equity firm Centum Investment.

Faced with the threat of competition from Carbacid which had entrenched itself in the market, BOC Kenya then decided it would be easier to acquire Carbacid than go on its own.

“Even before we had talked about a merger, BOC had tried to produce carbon dioxide and they weren’t too successful,” says Maina Wanjigi, chairman of Carbacid Investments Ltd.

“We’ve had some of these clients for the last 30 years and none of our clients have found fault with our service offerings,” says Mr Wanjigi, confident that Carbacid’s service delivery will propel the firm to greater heights.

Fuelled by Carbacid earnings have grown from strength to strength and are poised to surpass those of BOC this years, according to analysts.

The company is now proposing to raise its share capital to Sh250 million from Sh60 million through the issuance of 38 million shares of Sh5 each in move that will raise its capacity to take on more business.

Among the planned initiatives are in the areas of cylinder testing, dry ice blasting and the expansion of the firm’s distribution chain.

For BOC, the scenario couldn’t be more different.

Earnings dropped

The firm has seen its earnings drop in the last two years, which BOC’s management attributes to the challenges of increased operating costs driven by higher transport and energy prices.

Even after a revenue increase of 4 per cent in the first half of the year to stand at Sh641 million, a rise in the cost of raw materials and producing its goods led to a 20 per cent fall in half year profits to Sh108 million.

Still, there are hopes that this year is expected to be marginally better than last year when BOC recorded Sh1.28 billion in revenues compared to Sh1.5 billion in 2007.

Within the same period earnings to shareholders stood at Sh200 million compared to Sh267 million in 2007.

New entrants in the beverages and soft drinks market are however raising the prospects for both Carbacid and BOC.

Beer distillers Keroche Industries and Sierra beer all present a rewarding payoff for firms in the Co2 business.

And with service delivery the word of the day, BOC could well challenge Carbacid’s hold on East Africa Breweries Ltd and Coca Cola.

More significantly, the regional reach of beverage and soft drink manufacturers with markets in the region amidst rising demand promises a growth avenue for Co2 providers.

The major part of BOC’s business falls under the category of production and sales of gases and welding products with results from other sources comprising of less than 8 per cent of the total results of the group.

For BOC carbon dioxide provides an opportunity to rev up its revenues and create shareholder value at a time when its industrial and medical gases businesses seem to be stagnating.

A common thread for both BOC and Carbacid is the sizeable dividend payouts that have consistently placed both firms as coveted.

Last year for instance, BOC paid out a dividend of Sh6.80 for its full year ending December 2008 while Carbacid announced an proposed dividend of Sh10 and a special dividend of Sh5 per share.

These tidy dividend payments offer the only hope that shareholders might find these companies’ shares attractive despite their suspension from trading.

Share trades

Trading in both BOC’s and Carbacid shares have been suspended since December 2005, due to a proposed merger that hung on the balance until mid October.

BOC did not get enough support for the deal from Carbacid shareholders after Alliance Nominees declined to support the take-over.

That meant the firm could not attain the 80 per cent shareholder support it had targeted, managing only 71 per cent.