Lafarge Goes on Diet After Takeover Binge Hurts Credit Rating

Lafarge SA (LG) Chief Executive Officer Bruno Lafont knows from experience that getting into shape requires sacrifices.

Lafont says he has spent the past 18 months dieting to improve his lifestyle. Now the 54-year-old French executive will need the same resolve to slim down the bloated borrowings of the world’s largest cement maker. Lafarge has more than 14 billion euros ($20 billion) in debt, a load that cost the company its investment-grade credit rating at Standard & Poor’s in March.

To ease the burden, Paris-based Lafarge is considering the sale of a 1.4 billion-euro gypsum unit, which may attract bids from private-equity companies including TPG Capital and Carlyle Group LP, people familiar with the talks said in January. The sale would slice off a business that Lafont used to run and became a springboard for his three-decade career at the company.

“It’s likely heartbreaking for Bruno,” Michel Bon, who’s been on the Lafarge board since 1993, said in an interview. “He knows all the staff. If he has to do it, he’ll do it properly.”

Selling gypsum, which accounts for 9 percent of Lafarge’s revenue, may help Lafont restore some shareholders’ confidence in the cement maker, which has yielded no return since its purchase of an Egyptian cement maker for $15 billion in 2007.

The deal saddled Lafarge with debt just as construction slowed down. That’s left Lafont, who’s made more than 1.2 billion euros of disposals since the start of 2009, reviewing other ways to get the company into shape.

‘Company Must Prevail’

Lafarge is pledging to reduce investment and cut the dividend in half to meet a target of reducing borrowings by at least 2 billion euros this year. All options are on the table and there are “no taboos,” Lafont said in February.

That failed to convince Standard & Poor’s, which lowered Lafarge to BB+ a month later, citing “sluggish demand” and political upheaval in Egypt. Unrest in the North African country trimmed earnings by 30 million euros in the first quarter.

Lafont, who joined Lafarge in 1983, says he’s made tough calls before. Lafarge sold the Turkish cement operations that Lafont built up after the purchase of the assets in 1989. The retreat, which led to proceeds of 163 million euros, was part of a plan to raise 1 billion euros in 2009.

“It touched me a lot, but at some point, the interest of the company must prevail,” Lafont said in an interview in Paris on May 3. “The way it’s done and even the choice of the buyer is important. The group’s reputation is at stake.”

Tapping Shareholders

Lafarge snatched the No. 1 spot in the cement industry with its purchase of Blue Circle Industries Plc of the U.K. in 2001. Timing wasn’t on Lafarge’s side. Lafarge’s two largest deals were both followed by slowdowns in construction markets, forcing Lafarge to refinance.

“The huge error he’s made was to make a capital increase in 2009 and to use part of the proceeds to pay the dividend,” said Arnaud Cayla, a fund manager at Barclays Wealth Management France, which oversees 6 billion of assets including Lafarge stocks. “In the last decade, Lafarge has made two large deals, Orascom and Blue Circle, at the height of the cycle and was forced to trim debt afterwards by making a capital increase at the trough of the cycle. There’s little consideration for small shareholders in this kind of company.”

Lafarge shares have dropped 10 percent in the past year, more than Holcim SA, Europe’s No. 2, while HeidelbergCement AG (HEI), the German market leader, is up about 6 percent in the period.

Wrong Job

While Lafont has spent 28 years of his professional life at Lafarge, building materials weren’t his initial calling. Educated at a Jesuit school in the affluent 16th quarter of Paris, and a graduate of France’s ENA administration school, Lafont abandoned his first post at the finance ministry’s forecasting department after six months.

“I wasn’t made to be a civil servant,” said Lafont, who also graduated from France’s top business school HEC. “I looked for a company that had never been in the government’s hands, that was international and that was making money.”

Lafont, married to a violin player who fostered his passion for classical music and opera, last year visited customers and employees in 35 countries. The while the time on the road enhanced his cultural awareness, the travels came at the expense of his golf skills, he said.

Lafont joined Lafarge as an auditor in 1983, spent five years in Germany then moved to Turkey. He returned to Paris in 1994 to become CFO, and made his mark by almost doubling sales of the gypsum unit which he headed from 1998 to 2003, partly through acquisitions. He then moved on to become chief operating officer, before being tapped for the top job in 2006.

Acquisitions

Among his first moves was the $3.5 billion-purchase of the remainder of Lafarge North America Inc. He also eliminated a management layer to accelerate decisions. In 2007, he sold a roofing unit to private equity firm PAI for 2.1 billion euros, and announced the purchase of Cairo-based Orascom Cement, the biggest cement producer in the Middle East.

“When you make an acquisition of this size, it’s about execution,” said Oscar Fanjul, vice chairman of Omega Capital SL and the vice chairman on Lafarge’s board. Lafont “is good at managing execution. He’s not a pessimistic person, he’s quite realistic about the situation.”

The possible disposal of the gypsum unit may serve as a litmus test if Lafont can cut through old alliances and confront the uncomfortable reality of Lafarge’s debt burden. And while his 18-month crackdown on snacks has shown his determination to cut back, Lafont isn’t prepared to give it all up. Fanjul said he’s failed so far to convince Lafont to quit smoking cigars.

“I’m not perfect,” said Lafont. “I can’t commit to something I can’t deliver,” he said with a smile.

To contact the reporter on this story: Francois De Beaupuy at fdebeaupuy@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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