TheChek News Flow

Lafarge and Holcim announced on Friday afternoon that they are in “advanced

discussions regarding a possible combination”. We think this potential “merger of

equals” would create a mega cement company with a geographic reach not seen

before in the cement world. We estimate the new entity would control more than

400Mt of cement capacity, with combined sales of more than €30bn and EBITDA of

€6.7bn (2014 pro forma). We believe at this stage that this potential merger is more

likely than not to happen and we continue to hold a Buy rating for both stocks.

Combining the two largest cement companies in the world would generate

significant potential synergies, in our view, both on the cost and the revenue sides.

In a conservative scenario, based on previous large transactions in the sector, we

estimate potential synergies at €800m to €1bn per annum at EBITDA level,

equivalent to a post-tax present value of €7.2bn or c20% of the market value of the

combined entity (based on last Thursday closing price). Based on the scope and

scale of the potential merger, we however can’t exclude a much larger potential

synergy number. Applying a 50% to 60% premium to the base case, synergies

could amount up to €1.5bn per annum, equivalent to a post-tax present value of

€12bn or c32% of the market value of the combined entity. Lafarge would then be

valued above €80 and Holcim above CHF105. We think there could also be some

potential synergies on cost of debt, taxes and pensions liabilities, although they are

more complex to identify at this stage.

We think this potential merger would raise very significant issues with competition

authorities in many markets where Lafarge and Holcim are currently competing. We

identify six key countries that could be problematic in our view, and which might

prevent the merger from completing (or where the combined entity would likely be

forced to sell assets): the US, Canada, the UK, France, Romania and the

Philippines. We estimate that these markets together would account for about 35%

of sales of the new combined entity. We note that the press release however refers

to “advanced discussions” which we think could imply that the companies are

optimistic that these potential issues could be addressed in time.

There are several other key questions raised by this potential merger: 1/ the

potential structure of the deal, 2/ the implications for the credit ratings, 3/ the

management of the combined entity, 4/ the support from the large shareholders and

5/ the political risks, especially in France. We believe that a “merger of equals”

would potentially imply some transfer of value from Holcim toward Lafarge.

We believe that the market could discount a large part of the potential synergies.

We increase our PO on Lafarge to €70 (from €60) and on Holcim to CHF95 (from

CHF84), accounting for 75% of the potential synergies of our base case scenario.