Lafarge Sets Mideast Cement Deal

The French construction materials giant's acquisition of the largest cement producer in the Middle East will enable it to increase production by 50%

Lafarge shares shot up 15.1% on the Paris stock exchange Dec. 10 on news the French construction materials giant will acquire the largest cement producer in the Middle East, Cairo-based Orascom Cement, for $13 billion. The move will strengthen Lafarge's presence in one of the world's fastest-growing markets.

"This is the sweet spot of the cement market right now," says Yves Ayache, managing director of Morgan Stanley (MS) in Paris, which advised Lafarge (LAFP.PA) on the deal along with BNP Paribas (BNPP.PA) and Calyon, the investment banking arm of Crédit Agricole (CAGR.PA).

The Orascom Construction Industries Cement Group (OCIC.CA) is a top player in Egypt, Algeria, the United Arab Emirates, and northern Iraq, and has projects under way in Saudi Arabia, Syria, and Turkey. Thanks to rapid urbanization and buoyant economies driven by gas and oil wealth, the Middle East is a gold mine for producers of building materials. The very young populations in many Mideast countries also will boost the housing market, offering the potential for sustained, long-term growth in building materials.

Big Move to Developing Countries

The acquisition will enable Lafarge, already the world's largest producer of cement, to increase its production capacity 50% by 2010, to 260 million tons, said its chairman and chief executive officer, Bruno Lafont, at a press conference in Paris. Lafont added that by then Lafarge will derive 65% of its profit from emerging countries, up from 45% now. "In other emerging countries, cement is the first thing you need after food," Lafont says.

In the past two years, Lafarge has made efforts to move into developing markets, establishing a presence in China, Latin America, and Eastern Europe. With Orascom on board, Lafarge will operate in 90 countries.

Lafont expects the Orascom deal to raise Lafarge's sales growth by 3% annually through 2010, and help produce earnings per share of more than $22 that year, vs. $11.60 in 2006. The company already reported record earnings in the first nine months of this year: Net income increased 40% year-on-year to $2.26 billion, on sales of $19.6 billion, up 4%. Lafont also says Lafarge will divest $1.5 billion by the end of 2009, but has yet to determine where.

Details of the Deal

Lafarge's largest shareholder, Groupe Bruxelles Lambert (GBLB.BR), a Belgian holding company controlled by financier Albert Frère, supported the deal unequivocally, Ayache said. It will receive three seats on the Lafarge board but see its stake drop to less than 16%, from its current 17.4%.

Lafarge is financing the deal with $8.83 billion in debt and $4.12 billion in equity raised by issuing 22.5 million new shares to Nassef Sawiris, CEO of Orascom Construction Industries, who jointly owns 60% of the company with his family. Sawiris will take an 11.4% stake in Lafarge, and his family will get two seats on its board. Lafarge will also assume $2 billion in debt from Orascom Cement as part of the deal, to be completed at the end of the first quarter of 2008.

Shares of Orascom Construction Industries initially surged more than 10% on the Cairo & Alexandria Stock Exchange but closed down 4.3% as investors dumped their shares.

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