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Cement groups Lafarge, Holcim in $50b-plus merger talks

Paris/Zurich: The world’s two largest cement makers, France’s Lafarge and Switzerland’s Holcim, are in advanced talks to merge into a company with a stock market value of over $50 billion (Dh183.5 billion) in what would be the industry’s biggest ever tie-up.

The discussions, which are likely to draw close scrutiny from European competition watchdogs, are “based on principles consistent with a merger of equals”, the two companies said in identical statements on Friday.

They said no agreement had yet been reached and that there was no guarantee of a deal, but there was a “strong complementarity” and “cultural proximity” between the groups.

A merger would help Lafarge and Holcim slash costs, trim debt and better cope with the soaring energy prices and weaker demand that have hurt the sector since the 2008 economic crisis.

But any deal is likely to draw scrutiny from European competition watchdogs, as a Lafarge-Holcim entity would have a dominant position in both Europe and the United States.

Regulators would probably require the companies to shed cement plants and distribution facilities before approving any merger.

Such a merger would create a giant with combined sales of over $40 billion and would be Europe’s biggest tie-up this year, Thomson Reuters data shows, based on the cost to acquire the target and assuming that Lafarge, with the smaller market value, is the target company.

Shares in Lafarge and Holcim jumped to four-year highs on the news, lifting the entire cement sector.

“It’s good for the market,” said Clairinvest fund manager Ion-Marc Valahu. “There’s overcapacity and they need to consolidate their balance sheets.” Geographically, Lafarge and Holcim could complement each other well, said Natixis analyst Abdelkader Benchiha. Lafarge has a strong presence in Africa and the Middle East, while Holcim is strong in Latin America.

But a merger could take several years to come through, he warned: “There would be potential antitrust problems in the US, Canada, Brazil and France, where a Lafarge-Holcim entity would have a dominant position.” Lafarge’s 2013 merger with Tarmac, Anglo American’s UK business, was only approved by British antitrust authorities after both agreed to sell a significant number of assets.

Holcim and Mexican rival Cemex also announced plans in August to exchange some assets and combine others in Europe. European Union antitrust regulators are investigating aspects of the deal and whether it will reduce competition and result in higher prices for consumers.

Lafarge, whose cement helped build the Suez Canal in the 1860s and the Nazi bunkers that dot France’s Atlantic coast, employs around 65,000 workers in 64 countries. Holcim, which was founded in 1912, now has about 71,000 employees in 70 countries.

Both companies have significant and overlapping capacity in countries such as France, Germany, Spain, Czech Republic, Romania and Serbia, said Morningstar analyst Elizabeth Collins.

Lafarge estimates in its annual report that it has a cement market share of 40 per cent in the UK, 34 per cent in France, 33 per cent in Canada and 12 per cent in the United States. It goes above 30 per cent in several east European and African countries.

Both Lafarge and Holcim took on a big pile of debt in the past decade to expand in emerging markets, where rampant urbanisation has fed demand for building materials.

Then came a perfect storm. The US housing bubble burst, Europe sank into a sovereign debt crisis, and demand collapsed.

Lafarge further suffered when the Arab Spring sparked unrest in the very markets it had banked on with its €8.8-billion ($12-billion) takeover of Egypt’s Orascom Cement in 2008.

Meanwhile, energy prices spiked and many plants in this power-hungry business are now running at a loss or well below their capacity.

Lafarge and Holcim have since embarked on a cost-cutting drive and shed assets to trim debt. At Holcim the belt-tightening even affects the CEO, Bernard Fontana, known to stick to economy class on short-haul flights.

Natixis’s Benchiha estimates a merger would help Lafarge nearly halve its fixed and variable costs. Holcim has a better credit rating than Lafarge and the group could benefit from lower borrowing costs, he said.

Lafarge, whose debt pile has drawn “junk” ratings from credit rating agencies Standard & Poor’s and Moody’s, aims to regain an investment grade by year-end.

Shares in Lafarge jumped 8.9 per cent and were the top gainers on the French blue-chip CAC 40 index. Holcim stock rose 6.9 per cent. Holcim stock trades at 16.3 times forecast earnings, a discount to Lafarge’s 18.0 times.

Shares across the sector rose on news of the merger talks, on anticipation that the groups may have to divest assets that could boost smaller players.

Germany’s HeidelbergCement closed up 4.3 per cent, the leading gainer on the DAX top-30 index. Shares in Ireland’s CRH and Italy’s Buzzi Unichem and Italcementi also rose. Shares in Cemex were 3.8 per cent higher in Mexico City.