Holcim and Lafarge outline cement merger deal
An employee arranges cement bags at Switzerland's Holcim cement production plant in Siggenthal August 19, 2008. REUTERS/Christian Hartmann (SWITZERLAND) - RTR21EF5©Reuters
Holcim and Lafarge, the world’s largest cement makers, set out their proposed €39bn merger on Monday, raising the prospect of a swath of takeover activity across the building materials industry.
Revealing details of a deal styled a “merger of equals”, the partners said Holcim of Switzerland would take over Lafarge of France, offering one Holcim share for one Lafarge share, to create a global cement giant with combined sales of €39bn and earnings before interest, tax, depreciation and amortisation of €6.5bn.
Shares in Lafarge rose 4 per cent, the top gainer on France’s blue-chip CAC 40 index, while shares in Holcim were up 5.4 per cent in early morning trading.
The merger, under discussion since January, is set to trigger a wave of disposals worldwide and competition issues in at least 13 countries, ranging from Madagascar to France, Spain and the Czech Republic.
Ian Osburn, analyst at Cantor Fitzgerald, declared the sector “open” for mergers and acquisitions. “This is normally the most attractive time to do it at the start of the upswing and some of the other global majors may be feeling in a weakened position trying to compete with a combined Lafarge/Holcim,” he said.
Potential deals could involve Dangote Cement in Nigeria, Votorantim in Brazil or Vulcan Materials, analysts said.
Both partners said they expect the divestment programme to be completed by the time the deal closes in the first half of 2015, with two-thirds of the sales in Europe, where there is significant overcapacity in the cement market.
“We have had strong signals of interest of different kinds, although we could not yet open specific negotiations,” Rolf Soiron, the outgoing Holcim chairman, told the Financial Times. “The interest is more than hope.” He added that they were targeting asset sales of 10-15 per cent of ebitda and had already opened discussions with the European Commission, the executive arm of the EU.
Bruno Lafont, chief executive of Lafarge, will take up the same role in the combined group, while Holcim’s chairman designate Wolfgang Reitzle, will become group chairman.
Management said the move was not defensive but a side effect is likely to be accelerated margin recovery on cost savings. “When margins and cash flows are booming large mergers rarely look good compared to other growth investment but management and major shareholders are clearly impatient for improvement,” said Mr Osburn.
The global cement market is already heavily consolidated with four top cement producers – Holcim, the largest, with total sales of $22bn; followed by Lafarge, with sales of $20.8bn; HeidelbergCement of Germany, at about $18bn; and Mexico’s Cemex with $15.2bn. All have faced a series of competition investigations worldwide, including an investigation by the European Commission for cartel behaviour and price-fixing since 2008.
Christian Stadler, associate professor of strategic management at Warwick Business School, said there were question marks as to whether a merger on this scale will work. “There are lots of examples of megamergers destroying value rather than enhancing it,” he said. “A prime example comes from the car industry when Daimler and Chrysler merged, both companies lost billions of pounds before they agreed to part again. When BP merged with Amoco in 1998 they had many problems in terms of increased complexity and duplications, it certainly affected BP’s performance for a long time.”
Mr Lafont said the merger had been discussed with France’s Socialist government, which is highly sensitive to industrial mergers that could result in redundancies. He said the group’s research centre would be in France and “we are not talking about plant closures”, adding there would be a “very limited impact on employment”.
The new LafargeHolcim would be listed on the Six exchange in Zurich and Euronext Paris, with its domicile in Switzerland. Each company will have seven representatives on the board of the merged group. The merger was signed off by the boards of both companies over the weekend.