Holcim May Need Sweetener to Cement Lafarge Merger: Real M&A
2015-03-01 23:01:00.2 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Aaron Kirchfeld, Francois de Beaupuy and Jan-Henrik Förster
(Bloomberg) -- The merger of equals between cement giants
Holcim Ltd. and Lafarge SA is looking increasingly unequal to
some Holcim shareholders. It may take sweetened terms or cash to
keep them happy.
Since announcing the combination in April to create the
world’s biggest cement maker with about $40 billion in sales,
Swiss firm Holcim has outperformed its French partner Lafarge,
on average, in sales performance, profit and cash from
operations, according to data compiled by Bloomberg.
The gap between the two companies is fueling concern about
the deal’s structure among Holcim investors including Eurocement
Holding AG, the company’s second-largest shareholder, according
to people familiar with the matter. Pressure is rising for
Holcim to renegotiate the 1:1 share-exchange ratio, pay out cash
to investors or even reconsider the deal as a whole, the people
said.
“Holcim shows a better operational performance than
Lafarge since the proposed merger was announced,” said Rocchino
Contangelo, a fund manager at Zurich-based Swisscanto, which
owns shares in Holcim. “Some investors think that this better
operational performance should be reflected in the terms of the
deal.”
Contangelo said his firm hasn’t decided if it will back the
merger.
Exchange Disadvantage
The exchange ratio is a disadvantage for Holcim
shareholders, and the Swiss firm’s outlook on a stand-alone
basis would be better, according to a Swiss shareholder with
about 1 percent of Holcim, who asked not to be identified
publicly criticizing the deal.
To placate shareholders, Holcim and Lafarge are considering
paying a special dividend after agreeing to sell assets to CRH
Plc for 6.5 billion euros ($7.3 billion) to address antitrust
hurdles, according to two people familiar with the discussions.
Lafarge Chief Executive Officer Bruno Lafont said on Feb.
18 that the merged companies would aim to boost return to
shareholders rather than make new acquisitions.
Eurocement, which is owned by Georgia-born Filaret Galchev
and holds a 10.8 percent stake in Holcim, is also reviewing the
terms of the deal amid shareholder concern and plans to
communicate its stance in the coming weeks, according to two
people. Other smaller shareholders are also pushing for a change
in the exchange ratio or a special payment, they said.
No Change
Peter Stopfe, a spokesman for Jona, Switzerland-based
Holcim, said “the state of affairs remains unchanged” and that
there’s no mechanism to automatically adjust the exchange ratio.
He said the company will meet “all relevant shareholders”
during investor roadshows. Christel des Royeries, a spokeswoman
for Paris-based Lafarge, referenced comments from CEO Lafont,
who said the exchange ratio is “set by contract, and reflects
long-term prospects of the two companies.”
Representatives for Eurocement didn’t respond to requests
for comment sent by phone and e-mail.
For the merger to go through under its current terms, at
least two-thirds of Holcim shareholders still must approve a
capital increase. They’ll vote on it at an extraordinary meeting
that’s expected to be held in the first half after the company’s
annual meeting due April 13.
The agreed breakup fee of 350 million euros would be
annulled if Holcim shareholders vote down the transaction,
according to a person familiar with the matter.
Deal Logic
Holcim and Lafarge agreed to merge last year to unite
operations after the global recession eroded demand for building
materials, and as increased competition from emerging-market
rivals undermined profits. The companies expect the combination
to generate synergies of more than 1.4 billion euros.
While both Holcim and Lafarge have been experiencing
declining revenue and cash flow, Holcim’s have had less of a
slide since the deal was struck, on average. And Holcim’s Ebitda
margin -- or the earnings before interest, taxes, depreciation
and amortization it reaped on sales -- exceeded Lafarge’s in the
period, on average. That said, Lafarge led Holcim by that
measure during the six quarters before the deal was announced.
“Holcim’s fourth-quarter publication was good, Lafarge’s
less so,” Gaetan Dupont, an analyst at AlphaValue in Paris,
said in an e-mailed response to questions. Still, “the track
records of Lafarge and Holcim in the past two to four years
clearly show that Lafarge has been rather better managed than
Holcim, so it seems very unlikely that the deal is detrimental
to either of the companies.”
Valuation Gap
Even so, Holcim’s valuation has come under pressure. Before
the two agreed to combine, they had roughly the same ratio of
enterprise value to earnings before interest, taxes,
depreciation and amortization. Now, Holcim trades for just 9.7
times Ebitda, a 27 percent discount to Lafarge’s multiple, data
compiled by Bloomberg show.
Holcim’s valuation may be down in part because its
shareholders see less to gain in a deal. The stock was also
among a group of Swiss equities that took a hit this year after
the nation’s central bank allowed its currency to appreciate.
The company’s stock prices reflect some expectations that
the merger terms may be adjusted in Holcim’s favor, though only
a small probability, according to a Feb. 26 note by Patrick
Appenzeller, an analyst at Baader-Helvea in Zurich.
“We believe that the probability is much higher, based on
the changed fundamental outlook for the companies,” Appenzeller
wrote. He recommends that investors sell Lafarge shares and buy
Holcim’s. “Why should Holcim investors agree to such a bad
deal?”
For Related News and Information:
Lafarge Forecasts 2015 Profit Gains as Cement Markets Revive
CRH Buys Cement Assets From Holcim-Lafarge for $7.3 Billion
Holcim and Lafarge Managers Have Equal Billing in Merged Board
Holcim earnings graph: HOLN VX <Equity> FA ISBAR <GO>
Holcim enterprise value: HOLN VX <Equity> EV <GO>
Top Swiss stories: TOPS <GO>
Bloomberg Intelligence building-materials: BI BMATG <GO>
Top deal news: DTOP <GO>
Real M&A columns: NI REALMNA <GO>
--With assistance from Tara Lachapelle in New York.
To contact the reporters on this story:
Aaron Kirchfeld in London at +44-20-3525-8830 or
akirchfeld@bloomberg.net;
Francois de Beaupuy in Paris at +33-1-5365-5051 or
fdebeaupuy@bloomberg.net;
Jan-Henrik Förster in Zurich at +41-44-224-4116 or
jforster20@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net;
Simon Thiel at +44-20-3525-2814 or
sthiel1@bloomberg.net
Elizabeth Wollman
2015-03-01 23:01:00.2 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Aaron Kirchfeld, Francois de Beaupuy and Jan-Henrik Förster
(Bloomberg) -- The merger of equals between cement giants
Holcim Ltd. and Lafarge SA is looking increasingly unequal to
some Holcim shareholders. It may take sweetened terms or cash to
keep them happy.
Since announcing the combination in April to create the
world’s biggest cement maker with about $40 billion in sales,
Swiss firm Holcim has outperformed its French partner Lafarge,
on average, in sales performance, profit and cash from
operations, according to data compiled by Bloomberg.
The gap between the two companies is fueling concern about
the deal’s structure among Holcim investors including Eurocement
Holding AG, the company’s second-largest shareholder, according
to people familiar with the matter. Pressure is rising for
Holcim to renegotiate the 1:1 share-exchange ratio, pay out cash
to investors or even reconsider the deal as a whole, the people
said.
“Holcim shows a better operational performance than
Lafarge since the proposed merger was announced,” said Rocchino
Contangelo, a fund manager at Zurich-based Swisscanto, which
owns shares in Holcim. “Some investors think that this better
operational performance should be reflected in the terms of the
deal.”
Contangelo said his firm hasn’t decided if it will back the
merger.
Exchange Disadvantage
The exchange ratio is a disadvantage for Holcim
shareholders, and the Swiss firm’s outlook on a stand-alone
basis would be better, according to a Swiss shareholder with
about 1 percent of Holcim, who asked not to be identified
publicly criticizing the deal.
To placate shareholders, Holcim and Lafarge are considering
paying a special dividend after agreeing to sell assets to CRH
Plc for 6.5 billion euros ($7.3 billion) to address antitrust
hurdles, according to two people familiar with the discussions.
Lafarge Chief Executive Officer Bruno Lafont said on Feb.
18 that the merged companies would aim to boost return to
shareholders rather than make new acquisitions.
Eurocement, which is owned by Georgia-born Filaret Galchev
and holds a 10.8 percent stake in Holcim, is also reviewing the
terms of the deal amid shareholder concern and plans to
communicate its stance in the coming weeks, according to two
people. Other smaller shareholders are also pushing for a change
in the exchange ratio or a special payment, they said.
No Change
Peter Stopfe, a spokesman for Jona, Switzerland-based
Holcim, said “the state of affairs remains unchanged” and that
there’s no mechanism to automatically adjust the exchange ratio.
He said the company will meet “all relevant shareholders”
during investor roadshows. Christel des Royeries, a spokeswoman
for Paris-based Lafarge, referenced comments from CEO Lafont,
who said the exchange ratio is “set by contract, and reflects
long-term prospects of the two companies.”
Representatives for Eurocement didn’t respond to requests
for comment sent by phone and e-mail.
For the merger to go through under its current terms, at
least two-thirds of Holcim shareholders still must approve a
capital increase. They’ll vote on it at an extraordinary meeting
that’s expected to be held in the first half after the company’s
annual meeting due April 13.
The agreed breakup fee of 350 million euros would be
annulled if Holcim shareholders vote down the transaction,
according to a person familiar with the matter.
Deal Logic
Holcim and Lafarge agreed to merge last year to unite
operations after the global recession eroded demand for building
materials, and as increased competition from emerging-market
rivals undermined profits. The companies expect the combination
to generate synergies of more than 1.4 billion euros.
While both Holcim and Lafarge have been experiencing
declining revenue and cash flow, Holcim’s have had less of a
slide since the deal was struck, on average. And Holcim’s Ebitda
margin -- or the earnings before interest, taxes, depreciation
and amortization it reaped on sales -- exceeded Lafarge’s in the
period, on average. That said, Lafarge led Holcim by that
measure during the six quarters before the deal was announced.
“Holcim’s fourth-quarter publication was good, Lafarge’s
less so,” Gaetan Dupont, an analyst at AlphaValue in Paris,
said in an e-mailed response to questions. Still, “the track
records of Lafarge and Holcim in the past two to four years
clearly show that Lafarge has been rather better managed than
Holcim, so it seems very unlikely that the deal is detrimental
to either of the companies.”
Valuation Gap
Even so, Holcim’s valuation has come under pressure. Before
the two agreed to combine, they had roughly the same ratio of
enterprise value to earnings before interest, taxes,
depreciation and amortization. Now, Holcim trades for just 9.7
times Ebitda, a 27 percent discount to Lafarge’s multiple, data
compiled by Bloomberg show.
Holcim’s valuation may be down in part because its
shareholders see less to gain in a deal. The stock was also
among a group of Swiss equities that took a hit this year after
the nation’s central bank allowed its currency to appreciate.
The company’s stock prices reflect some expectations that
the merger terms may be adjusted in Holcim’s favor, though only
a small probability, according to a Feb. 26 note by Patrick
Appenzeller, an analyst at Baader-Helvea in Zurich.
“We believe that the probability is much higher, based on
the changed fundamental outlook for the companies,” Appenzeller
wrote. He recommends that investors sell Lafarge shares and buy
Holcim’s. “Why should Holcim investors agree to such a bad
deal?”
For Related News and Information:
Lafarge Forecasts 2015 Profit Gains as Cement Markets Revive
CRH Buys Cement Assets From Holcim-Lafarge for $7.3 Billion
Holcim and Lafarge Managers Have Equal Billing in Merged Board
Holcim earnings graph: HOLN VX <Equity> FA ISBAR <GO>
Holcim enterprise value: HOLN VX <Equity> EV <GO>
Top Swiss stories: TOPS <GO>
Bloomberg Intelligence building-materials: BI BMATG <GO>
Top deal news: DTOP <GO>
Real M&A columns: NI REALMNA <GO>
--With assistance from Tara Lachapelle in New York.
To contact the reporters on this story:
Aaron Kirchfeld in London at +44-20-3525-8830 or
akirchfeld@bloomberg.net;
Francois de Beaupuy in Paris at +33-1-5365-5051 or
fdebeaupuy@bloomberg.net;
Jan-Henrik Förster in Zurich at +41-44-224-4116 or
jforster20@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net;
Simon Thiel at +44-20-3525-2814 or
sthiel1@bloomberg.net
Elizabeth Wollman