Holcim to Merge With Lafarge to Form Biggest Cement Maker
Holcim Ltd. and Lafarge SA (LG) agreed to form the world’s largest cement maker as they prepare to sell assets with 5 billion euros ($6.9 billion) in revenue to win regulatory approval for the biggest European deal this year.
About two-thirds of the divestments will come from Europe, according to Lafarge Chief Executive Officer Bruno Lafont, who will lead the merged company. The new entity, with $40 billion in annual revenue, may also sell assets in Canada, the U.S., Brazil, India and China, he said on a conference call today.
Combining Jona, Switzerland-based Holcim and Paris-based Lafarge will let the cement producers unite operations after the global recession eroded demand for building materials and pushed some of the industry’s kilns to run at a loss. More consolidation may follow, said Christopher Kummer, president of the Institute of Mergers, Acquisitions and Alliances in Vienna.
The merger “will have to undergo heavy scrutiny from several competition authorities,” said Caroline Brugere, an analyst at Credit Agricole in Paris. “Holcim and Lafarge both own prominent positions in Europe.”
Lafarge’s Lafont said he’s expecting to have to address about 15 competition authorities worldwide. Canada and Morocco may also be a concern from an antitrust point of view, Brugere said in a note.
Competitors will consider buying some of the assets, Deutsche Bank analysts Glynis Johnson and Manu Rimpela said. Listing units, spinoffs and selling to private equity are options, Holcim Chief Financial Officer Thomas Aebischer said in an interview.
“Forced disposals may offer opportunities for others to pick up assets at perhaps opportunistic prices,” the analysts wrote. Those who may look to pick up assets could include Germany’s HeidelbergCement AG, Ireland’s CRH Plc and Mexico’s Cemex SAB (CEMEXCPO), the biggest cement maker in the Americas, they said.
HeidelbergCement, CRH and Cemex declined to comment on potential asset purchases.
“It’s being labeled as a merger of equals, which in most cases has not really worked,” including the Daimler AG and Chrysler Corp. deal unwound in 2007 after less than 10 years, Kummer said by phone. “In this case it really can work.”
The deal, structured as an all-share merger, will lead to synergies of more than 1.4 billion euros and probably close in the first half of 2015, according to Holcim and Lafarge. The asset sales of the new company, to be called LafargeHolcim, will represent 800 million euros in earnings before interest, taxes, depreciation and amortization, the companies said.
“The task will be vast,” said Eric Lemarie, an analyst at Aurel-BGC in Paris. “But divestments and swaps are frequent in this industry.”
Lafarge shares gained as much as 5.4 percent in Paris while Holcim rose as much as 7.3 percent in Zurich. Lafarge and Holcim surged on April 4 after Bloomberg News reported they were in talks later confirmed by the companies.
The two companies have a combined market value of more than $50 billion. The transaction would be the second-biggest deal announced globally this year, after Comcast Corp.’s bid for Time Warner Cable Inc.
At least four billionaires own shares in Holcim or Lafarge, including Egypt’s richest person, Nassef Sawiris; Belgium’s Albert Frere; Switzerland’s fourth-richest individual, Thomas Schmidheiny; and Georgia-born Filaret Galchev, according to Bloomberg data.
Schmidheiny is fully behind combining Holcim, the company founded by his family and which he led for more than 20 years, with its French competitor, the billionaire’s spokesman Joerg Denzler said by phone.
“The deal means that Holcim loses its family touch slightly,” Denzler said. “The world changes. We will create a real game changer.”
Holcim will start the public exchange offer with a ratio of one of its shares for one Lafarge share. Each Lafarge investor tendering shares will receive an equal number of newly issued Holcim shares. The offer is subject to Holcim holding at least two-thirds of the share capital and voting rights of Lafarge on a diluted basis, the companies said.
Asked whether the deal’s structure indicates that Holcim is taking over Lafarge, Lafont told journalists on a call today that the transaction is a merger of equals. He declined to elaborate. Wolfgang Reitzle, who was to become chairman of Holcim, will assume that role for the enlarged business.
At 181-year-old Lafarge, Lafont has been slashing spending, pushing sales of higher-margin services and selling assets to repair a credit rating that has fallen one level below investment grade amid a slump in European construction and rising energy prices.
Holcim CEO Bernard Fontana became the first outsider to lead Holcim when he joined the 102-year-old Swiss company in February 2012. Drawing on his past experience of overhauling steelmaker Aperam, the French national has embarked on a similar cost-cutting program, using the same “Leadership Journey” label he employed in his prior post.
An acquisition spree before the financial crisis, including Lafarge’s 10.2 billion-euro purchase of Orascom Cement in 2008 and Holcim’s $4.1 billion deal for Aggregate Industries in 2005, increased the global reach of both companies. Holcim employs 71,000 people in about 70 countries while Lafarge has about 65,000 workers in 64 markets.
“The first destination of the proceeds from asset sales will be for the creation of a strong financial structure,” Lafont said at a press conference in Paris today. He didn’t rule out other uses when asked about possible share buybacks or the payment of a special dividend.
The merger will also cut costs in areas such as logistics, distribution, IT, energy consumption, procurement, maintenance and general administration, the companies said.
“We strongly believe that those divestments will answer the requirements of the regulatory authorities,” Lafont said.
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