Feb. 20 (Bloomberg) -- Lafarge SA, the world’s biggest cement producer, and building-materials supplier Cie. de Saint- Gobain SA plan to sell 3 billion euros ($3.8 billion) in shares to shore up finances eroded by slowing construction markets.

Saint-Gobain investors will be offered 1.5 billion euros of stock at 14 euros apiece, the supplier of glass and concrete products said today. That’s 50 percent less than yesterday’s closing price of 27.99 euros. Lafarge, yet to announce terms, said its two largest shareholders, Groupe Bruxelles Lambert and NNS Holding, back the plan.

The rights offerings highlight a deepening building slump at a time when the companies have spent more than $25 billion combined on acquisitions to expand globally. Saint-Gobain, based near Paris, said 2009 will be “extremely challenging” following a sharp deterioration in demand in the fourth quarter. The company cut 8,000 jobs last year, twice as many as planned.

“It’s natural that they try to build up their capital,” said Jacques-Antoine Bretteil, who manages about $312 million at International Capital Gestion in Paris. “Both these companies have taken good steps to deal with the situation.”

Saint-Gobain, offering two new shares for every seven owned, dropped 15 percent to 23.8 euros in Paris. Lafarge fell 2.4 percent to 35.93 euros. Its nearest rival, Holcim Ltd. of Switzerland, fell 7.3 percent.

“The market doesn’t understand why Saint-Gobain is doing such a large-scale capital increase at this stage,” Chicuong Dang, an analyst at KBL Richelieu Gestion, which oversees $5 billion in Paris, said in a television interview.

Race Peters Out

Paris-based Lafarge is Europe’s most indebted cement maker after spending $15 billion in 2007 to add the cement unit of Orascom Construction and become the Middle East’s No. 1 supplier. Financing the purchase almost entirely with debt was at the time the optimal solution, yet that strategy has fallen short in the current financial climate, Lafont said.

The French company joins rivals Holcim and Cemex SAB in announcing cutbacks after they engaged in a global race to claim market share through acquisitions in faster-growing emerging markets. The onset of the financial crisis and a slump in housing and construction markets are leading them to review plans.

Buyers’ Market

Chief Executive Officer Bruno Lafont extended an asset-sale program. He may struggle to lure buyers as rivals also seek to sell units just as spending is being limited to preserve cash. Faced with burgeoning debts, HeidelbergCement AG is divesting German lime operations and is reviewing other possible sales to improve finances. Monterrey, Mexico-based Cemex, North America’s largest cement maker, is also slashing costs and selling assets.

Talks are under way to sell stakes in factories in Turkey, with Lafarge being advised by JPMorgan Chase & Co. The company may choose to sell other assets in Latin America, where local buyers have cash and the desire to grow, Arnaud Pinatel, an analyst at Exane BNP Paribas, said in a Feb. 17 note.

Saint-Gobain Chief Executive Officer Pierre-Andre de Chalendar aims to reduce costs by 600 million euros this year after last year’s cut of 400 million euros. He plans to curb capital expenditure by at least 25 percent, carrying out “small- or medium-sized disposals.” Acquisition projects are on hold after 2008 profit before one-time items slid 9.5 percent to 1.91 billion euros. Revenue was little changed at 43.8 billion euros.

Market Weakness

European construction output fell the most since 1995 last year as the global economic slowdown curbed building of offices, shops and houses across the continent. Construction in the euro area fell 10 percent in December from a year earlier, the biggest drop since 1991.

A weakening building-materials industry will restrict Lafarge’s ability to cut debt further, said Moody’s Investors Service in a Jan. 16 note downgrading the company’s debt by one notch to Baa2. Lafarge predicts cement volumes will fall as much as 3 percent in 2009 as mature economies scale back construction and emerging-market growth slows. That will pressure margins, yet pricing should remain firm overall, Lafarge said.

“Our balance sheet is seen as insufficient and not suited for such uncertain times,” Lafont told journalists. “We don’t want there to be any doubts whatsoever about our ability to repay our debts.”

Erasing Doubts

Lafont aims to save 400 million euros over the next three years, part of a 4.5 billion-euro package of measures that includes accelerating the repayment of debt taken on to buy the Orascom unit. A new 1 billion-euro two-year bank facility will help repay the 2.6 billion euros in borrowings stemming from the purchase by June 2009, removing a covenant that is hanging over Lafarge’s finances.

Cost-cutting initiatives will be extended to help save 200 million euros in 2009 and Lafarge’s investment budget will decline by the same amount to 1.8 billion euros. Lafont is looking to sell 1 billion euros in assets.

The CEO said he’s got backing for the rights offering in the form of Groupe Bruxelles Lambert and NNS Holding, Lafarge’s biggest shareholders, who together have committed to buy 500 million euros worth of new shares. Six banks comprised of BNP Paribas SA, Credit Agricole SA, Citigroup Inc., HSBC Holdings Plc, Societe Generale SA and Morgan Stanley have underwritten the rest, guaranteeing they will buy any leftover stock.

To contact the reporter on this story: Andrew Noel in London on anoel@bloomberg.net.

Last Updated: February 20, 2009 11:43 EST