June 4 (Bloomberg) -- Lafarge SA, the French cement maker that plans to merge with Holcim Ltd. of Switzerland to become the world’s biggest producer of the building material, will combine Nigerian and South African assets to form a new company to compete with Africa market leader Dangote Cement Plc.
The entity will be known as Lafarge Africa Plc and be listed on the Nigerian stock exchange, the Paris-based company said in a statement yesterday. The business will have cement production capacity of 12 million metric tons and had combined revenue of $1.25 billion in 2013.
The deal “is aimed at responding to its more aggressive rival, Dangote Cement, and to consolidate its positioning as a leading cement firm,” Tunde Abidoye, an analyst at Lagos-based FBN Capital, said in e-mailed note today. While synergies may be modest, the company will gain production capacity and market share in the continent’s two biggest economies, he said.
Lafarge, which has operations in 64 countries, has been adding capacity in Africa to take advantage of the need for new infrastructure in developing economies and to offset a construction slump in Europe. The company is competing against Lagos-based Dangote, which is expanding across the continent, as well as Johannesburg-based PPC Ltd., which is also trying to boost revenue outside its domestic market.
“It will boost their profile, strengthen their capacity and pricing on the Nigeria market, unlike when it was like a fringe player in different African markets,” Mike Nwanolue, an analyst at Lagos-based Greenwich Trust Group Ltd., said by phone. “Dangote cement got a lot of attention in the continent with acquisitions, which enabled it to source funds and build capacity. Some of that attention will now be shifted to Lafarge Africa and competition deepened.”
Dangote Cement, controlled by Africa’s richest man Aliko Dangote, plans to have capacity of more than 60 million tons in 2016. PPC plans to boost production to 14 million tons by the end of 2017.
Lafarge is at loggerheads with Nigerian regulators after its preferred 32.5 grade cement was deemed unsafe for anything other than plastering. Only 42.5 grade cement -- a market controlled by Dangote -- may be used for columns and slabs, the Standards Organisation of Nigeria said last month. There are several impending court actions challenging the ruling, Lafarge said June 2.
The transaction to create Lafarge Africa will include a cash payment of $200 million and the issue of 1.4 million shares to the parent company. Lafarge’s Nigeria-listed shares gained 5 percent to 118.12 naira as of 11:10 a.m. in Lagos, the biggest gain in more than two months. The company is valued at 355 billion naira ($2.2 billion).
Lafarge has been selling assets to repair a credit rating that has fallen one level below investment grade and to reduce borrowings. The company reduced its net debt to 9.95 billion euros ($13.6 billion) at the end of December and has a target of below 9 billion euros by the end of this year.
“The transaction is positive and consistent with the group’s attempt to reduce debt,” Sven Edelfelt, an analyst at Bryan Garnier in Paris, said in a research note today. “It could pave the way to further transfer cement assets across Africa into the newly-formed Lafarge Africa and could help reach the net debt target.”
Lafarge has operations in several African countries including Algeria, Tanzania and Madagascar. Its market share in Kenya is being probed by the antitrust authority over concerns that it has too much influence on prices. Lafarge has rejected the claim.
It’s “a good move,” Lanre Buluro, the Lagos-based head of research at Primera Africa Securities Ltd., said in e-mailed comments about Lafarge Africa today. “It’s definitely a move to grab market share by capacity from Dangote in Nigeria.”
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