A pair of unprecedented, big takeover deals in Uganda’s industrial sector during the fourth quarter of 2023 has exposed the “low-hanging fruit” in the manufacturing sector, changing investor attitudes and increased appetite for risk.

Previous private equity and venture capital investment tracking reports show the country’s financial services, information and communications technology (ICT) and real estate sectors have enjoyed the lion’s share of mergers and acquisitions deals, with the manufacturing sector bringing up the rear.

But latest takeover deals announced by Cipla Quality Chemicals Ltd and Hima Cement Ltd, which bear a collective value of more than $100 million, have signalled a departure from dull deal-making activity pegged to the local manufacturing sector.

While Cipla showed signs of hunger for a commercial turnaround strategy after five years of stockmarket blues prior to the takeover, Hima Cement was reportedly keen to exit the local market after the entry of more aggressive rivals.

Read: Competition pushes down price of cement in Uganda

Cipla, a local producer of pharmaceutical drugs, was acquired by Capital Works SSA in mid-November after regulatory approvals in a takeover deal that gave the American firm a 62.5 percent stake in the drug firm valued at about $30 million, according to company sources.

The pharmaceutical firm was listed on the Uganda Securities Exchange in September 2018.

While Cipla Quality Chemicals Ltd remains the country’s leading supplier of HIV/Aids, tuberculosis, malaria and hepatitis drugs, it has come under intense pressure from falling sales revenues, profits and high operating costs. Its share price has dropped from its initial public offering value of Ush256.5 ($0.07) to a record low of Ush52.5 ($0.01) in November.

The company’s total sales revenues slightly grew from Ush120 billion ($31 million) in September 2022 to Ush121.2 billion ($32 million) in September 2023, while its profit before tax fell from Ush22 billion ($5.8 million) to Ush7.1 billion ($1.8 million) during the same period.

The firm’s earnings per share dropped from Ush3.79 ($0.001) in September 2022 to Ush0.97 ($0.0003) in September 2023. Its total assets increased from Ush213 billion ($55.7 million) in September 2022 to Ush217.8 billion ($57 million) in September 2023, according to the latest financial results.

A senior executive who requested anonymity citing confidentiality obligations told The EastAfrican that the return of Capital Works will eliminate the commercial conflict of interest brought about by its control of the business. This is because Cipla India and Cipla South Africa have indirectly cannibalised Cipla Uganda’s business opportunities for a long time and this has severely affected the company’s financial performance.

Read: Ugandan manufacturers push for return to Rwandan market

“This transaction is worth $30 million-$35 million and clearly promises strong growth opportunities for Cipla Quality Chemicals going forward,” the source said.

In comparison, Hima Cement’s exit from the Ugandan market is partly attributed to rising competition, fears of lower revenue margins and market share. Hima is a subsidiary of Kenya’s Bamburi Cement Ltd, which in turn is controlled by Lafarge-Holcim, a global leader in the cement production industry.

Under the takeover deal, Himcem Holdings Ltd, Cementia Holding AG, Sarrai Group Ltd and Rwimi Holdings Ltd will jointly acquire the entire issued share capital of Hima Cement from Himcem Holdings Ltd amounting to 70 percent shareholding, while Cementia Holding AG will acquire the remaining 30 percent. The total acquisition cost stands at $120 million, according to a corporate notice issued by Bamburi Cement. The transaction is subject to regulatory approvals.

Although Hima Cement’s latest financial statements were not available by press time, local industry data points to rising production levels, compressed market share and a diminished oligopoly environment.

While total cement demand remained flat at 4.4 metric tonnes in the 2021/22 financial year, Uganda’s total cement production capacity is projected to clock eight metric tonnes by end of 2023, according to an industry research note published in the International Cement Review edition of July 2023.

Read: Cipla’s takeover by Capital Works stirs Uganda market

Uganda’s per capita consumption of cement is estimated at 100kg, compared with Kenya and Tanzania, at 175kg and 110kg, respectively. Hima Cement and Tororo Cement Ltd are dominant market players with a combined market share of 80 percent, the research note indicated. Other cement producers in the Ugandan market are Simba Cement, Kampala Cement and Metro Cement.

Alex Nakajjo, a trade policy consultant, says Hima Cement was a big player in Uganda’s cement industry 10 years ago and had few rivals to worry about. There was excess cement demand in Uganda and the company found it easy importing cement from its sister company in Kenya and selling it in Uganda at lucrative prices.

But the expansion of Tororo Cement and the entry of new players has created price pressures for Hima cement’s products. Its market share may be huge but it is suffering from depletion caused by new industry rivals.

“As a result, the excess cement market demand levels have disappeared while Hima’s profit margins are coming under pressure as well. Mergers and acquisition deals in the industrial sector might favour aggressive but established investors who are likely to incur small entry point costs unlike new, overseas investors that feel scared of American warnings about the state of Uganda’s politics and the local economy,” Mr Nakajjo said.

Read: Cipla bounces back to profit-making territory

The number of disclosed private equity and venture capital transactions in East Africa stood at seven in October 2023, compared with six recorded in the previous month, while the total deal value amounted to $58.3 million during the same period, according to latest data compiled by I&M Burbidge Capital based in Nairobi.

High-profile transactions reported in the Ugandan market during October include an additional investment of $46 million announced by shareholders of Raxio Data Centre, a data backup services provider.

Exeo Capital, a foreign private equity firm, also invested $10 million in Amos Dairies, a local milk processing firm.

Justin Osillo, a partner at PGS Osillo Certified Public Accountants, said the government’s growing emphasis on import substitution and export promotion is likely to boost industrial sector growth in the medium term.

“There is a Chinese company that has invested in a clinker processing plant in Karamoja region and this is likely to cut costs of production in the cement business and increase competitiveness in the construction sector as well,” he said.