EZDK to acquire EFS at US$10.09/share and ERM at EGP23.07/share
Al Ezz Dekheila Steel (EZDK) will acquire the remaining 56% stake in EFS and 100% of ERM through a non-cash transaction. The deal values: 1) EFS at US$10.09/share, implying an equity value of US$757mn and equity value attributable to Ezz Steel (ESRS) of US$356mn (EGP5.9bn), which translates into roughly EGP10.8/share attributable to ESRS; and 2) ERM at EGP23.07/share, implying an equity value of EGP2,074mn, which translates into roughly EGP3.83/share attributable to ESRS.
The deal structure
Combined together, EZDK will owe ESRS, ERM and EFS shareholders EGP9,066mn, which will be accounted for as a liability on EZDK books. EZDK will later on issue up to 13mn shares in the form of a capital increase at EGP1,176/share and could potentially raise EGP15.3bn. The amount due to ESRS, ERM, and EFS shareholders will be used to subscribe the capital increase and EZDK minority shareholders will be entitled to 0.97shares/current share to maintain current ownership, but will have to pay EGP1,176/share. If the regulator challenges the transaction or restricts voting to minority shareholders, this will be a key downside risk to ESRS shareholders.
EZDK shareholders will either overpay or face dilution risk
In the event that the minority did not subscribe, ESRS ownership in the new entity will increase and could reach a maximum of 78% in the new EZDK entity. In our view, ESRS shareholders are pure beneficiaries of the transaction while EZDK shareholder will overpay to acquire EFS and ERM (roughly 2.03x ESRS market cap). Additionally, EZDK shareholders will now be entitled to more losses coming from EFS.
The structure for ESRS and EZDK post acquisition
Post the transaction, ESRS will own 55%-78% of the new EZDK entity and 100% of ESR and EZDK will own 100% of EFS and 100% of ERM in addition to its existing plant. The new EZDK entity will own 1) 5.1mtpa of DRI capacity, and 2) 4.9 mtpa of rebar and flat steel capacity. Management assured us that no de-listing will take place post the transaction.