Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

It's party time in cement world. LafargeHolcim, the industry's biggest company, should this week be celebrating the one year anniversary of its founding merger -- valued at $50 billion at inception. The rejoicing will in fact be among its rivals given the deal's dire performance, which seems to confirm every suspicion about "mergers of equals".

LafargeHolcim has fallen 39 percent since its forerunner, Switzerland's Holcim, revealed plans to combine with France's Lafarge in April 2014. Irish building materials group CRH is up 29 percent in the period; HeidelbergCement is up by 13 percent. The Bloomberg European 500 index has shed just 1.5 percent.

Cement Spread
Holcim has badly lagged peers since revealing merger talks with Lafarge in April 2014
Source: Bloomberg

Results have been poor and expectations are low. LafargeHolcim made a pro forma net loss of 2.1 billion Swiss francs ($2.1 billion) last year following a raft of write-downs and one-off hits. In 2014, Holcim made net profit of 1.6 billion Swiss francs; Lafarge made 274 million euros ($303 million). The deterioration means LafargeHolcim shares are still expensive on a price-to earnings basis, trading on 18 times forecast earnings. Pre-merger, the companies traded on about 13-14 times.

Merger Math: 2 + 2 < 0
Lafarge and Holcim merged in July 2015 and ended the year making a combined operating loss
Source: Company reports
* Converted into Swiss francs at EURCHF rate of December 31, 2014

LafargeHolcim ought to be coping well in spite of a deterioration in some markets. The company expects to meet its goal of 1.5 billion Swiss francs of annual deal benefits a year ahead of plan in 2017. In theory, these are worth 10 billion Swiss francs on the market capitalization. Had the shares tracked the index and priced them in, LafargeHolcim would be worth nearly 60 billion Swiss francs -- more than double its current market value.

CEO Eric Olsen has to demonstrate that the deal hasn't just created a business that's too big to manage, and whose financial benefits merely offset damage caused by the disruption of the whole project. Cement is inherently a local business and so scale economies aren't so easy. And while these are industrial companies, cultural differences between Lafarge and Holcim may be impeding progress.

True, a year is a bit soon to pass judgement. But right now, it looks like a terrible outcome for a deal that required billions of dollars of disposals to ease anti-trust concerns. A chunk of those assets went to CRH, which presumably can't believe its luck. Moreover, the costs of the merger billed in 2015 were some 1.1 billion Swiss francs.

How could such a deal come about? Rewind back to early 2014 and there was a moment when the share prices of Holcim and Lafarge, and the Swiss franc and euro exchange rate, suddenly aligned so that crunching the companies together at prevailing market values could be done at a neat 1-for-1 share swap ratio. That trivial coincidence of market dynamics was one catalyst: it made a merger-of-equals structure, with no premium paid to either side, look easy.

What followed was much harder. A spat over governance saw the CEO-designate, Lafarge's Bruno Lafont, replaced by Olsen at the last minute. That beautiful share swap ratio had to be tweaked to appease unhappy Holcim investors. Ambition -- the chance to create the world leader by size -- kept it all going. And Lafarge was in a tight spot. It had a much weaker balance sheet so the tie-up provided a convenient recapitalization at Holcim's expense.

Are all mergers of equals -- like the one proposed by London Stock Exchange and Deutsche Boerse -- doomed? Probably not. But takeovers have one big benefit over a merger. One side pays a premium and has to justify it. That may make at least one half of the marriage think twice before committing for life.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net