Lafarge/Holcim will prompt major players to assess position, Hope seen waiting in wings
* Secondary activity dependent on nature of asset sale
* Further consolidation in UK market hampered by significant competition constraints
* Mittal-backed Hope seen as ambitious
The creation of the world’s biggest building materials group through the merger of Holcim [VTX:HOLN] and Lafarge [EPA:LG] could result in further large-scale deals, sector sources said. The merger is set to complete in the first half of 2015.
Other major European cement makers will have to evaluate their position and assess how they can compete with such a huge player in the market, said the first sector source.
Significant regional players include Germany’s HeidelbergCement [ETR:HEI], Italian groups Italcementi [BIT:IT] and Buzzi Unicem [BIT:BZU], and Irish group CRH. Activity in the UK among the largest players will be severely restricted by competition issues, the sector sources added.
Changes to the market will largely depend on who buys the package of assets being disposed of by Holcim and Lafarge and for how long the buyer holds them, according to Thierry Sauvaire, CEO of Eurocement Holding – Holcim’s second biggest shareholder.
A second sector source added that how the assets are sold, whether as a package or piecemeal, will influence the level of secondary activity. Small disposals may follow the 1H15 completion of the asset sale process, said the sources.
Several private equity bidders including Blackstone and CVC remain in the running to buy some or all of the assets. Assets in Europe, Canada, Brazil and the Philippines representing around 10-15% of combined global EBITDA are being sold to comply with competition approvals for the merger.
Parties will attempt deals that are largely defensive in nature, it was said. But executing deals is complicated and all major players face significant competition issues, according to the sources. The ownership of many cement makers is also an impediment to deals, it was said. Many cement producers, such as Italcementi and Sabanci, are family owned or have a dominant shareholder.
There are some rumours in the market of a potential Italcementi Heidelberg tie-up, the second source said. But he added that he was skeptical this would happen as significant overlaps would plague the deal with antitrust hurdles.
While the Lafarge/Holcim deal will reshape the industry, in Europe – and the UK particular – the competitive dynamic will largely remain the same, with one exception, as one player will exit the market through the merger and another will move in.
The merging parties are divesting Lafarge Tarmac, one of the biggest British producers, to comply with regulatory approval conditions. When Lafarge Tarmac was established in 2011/2012 through a joint venture between Lafarge and Anglo American [LON:AAL], the then UK regulator, the Competition Commission, undertook a lengthy review.
Following the Lafarge/Holcim merger, while Lafarge Tarmac will be sold, the Cauldon cement plant in Staffordshire will be retained by the merged Lafarge/Holcim. This means that Holcim’s subsidiary, Aggregate Industries, which previously only supplied cement rather than produce it, will become a cement producer for the first time. It already produces ready-mix concrete, aggregates and asphalt.
In the mature UK industry the four major players – Cemex, Hanson (HeidelbergCement’s UK business), Lafarge Tarmac and Hope Construction Materials – are largely hamstrung by competition issues so there will be limited merger activity as a result, said one of the sector sources.
But Hope, which is the most recent entrant Europe’s cement market, is seen as waiting in the wings and may well facilitate M&A outside its current UK-only operations, according to several sector sources.
The group is backed by Lakshmi Mittal – chairman, CEO and leading shareholder of steel giant ArcelorMittal - whose son-in-law is Hope’s chairman. The company was established two years ago when it bought 150 sites sold by Lafarge and Anglo American subsidiary Tarmac to secure competition approval for their joint venture.
"I'd understood they [Mittal] were quite interested in using the Hope plants as a way for Mittal to get experience in cement production, [with a view to] then expanding,” said a third sector source.
The Lafarge-Holcim merger could result in some good opportunities for other players, and Hope will be keeping a close eye on how things evolve, said Andi Hodgson, Marketing Director at Hope.
Moody’s predicts a modest growth of 2-3% in European cement volumes in 2015 but balance sheets will remain constrained. A small uptick in margins is also expected, according to the rating agency.
Hanson has seen mainstream aggregates, concrete and cement volumes rise ahead of forecasts in 2014 and trade associations are predicting growth of 4-5% in 2015, said a spokesperson for Hanson. Demand is expected to pick up into 2015, although the UK general election in May could result in uncertainty around major infrastructure spending, he added.