Holcim Talks About $40 Billion Cement Merger With Lafarge

Holcim Ltd. and Lafarge SA, the world’s two biggest cement makers, are in advanced merger talks to create a company with $40 billion in sales and better able to deal with production overcapacities and higher energy costs.

The companies are exploring a merger of equals that would build on their “strengths and identities,” Jona, Switzerland-based Holcim and Paris-based Lafarge said today. Bloomberg News reported the discussions earlier today. Lafarge rose 8.9 percent in Paris trading while Holcim gained 6.9 percent in Zurich.

A deal would allow the cement producers to cut costs by combining their production operations as some of the industry’s kilns run at a loss after the recent global recession eroded demand for building materials. To improve returns from energy-gobbling plants, Holcim in August agreed to swap assets in Germany and the Czech Republic with Monterrey, Mexico-based Cemex SAB, the biggest cement maker in the Americas.

“There is still massive oversupply in the industry,” Ian Osburn, an analyst at Cantor Fitzgerald, said in an interview. A deal would help Holcim and Lafarge to “cut a lot of costs and dominate a few more markets.”

An acquisition spree before the financial crisis, including Lafarge’s 10.2 billion-euro ($14 billion) purchase of Orascom Cement in 2008 and Holcim’s $4.1 billion deal for Aggregate Industries in 2005, widened the dominance of both companies.

Regulatory Scrutiny

A transaction may face scrutiny from regulators in markets around the world and Osburn said the companies would need to sell assets in Europe and the U.S. The deal would face reviews in Europe, especially in France, as well as in Spain and Germany, he said, while regulators in Russia, Hungary and the Czech Republic may also examine the transaction.

Lafarge estimates in its 2013 annual report that last year it had a cement market share of 34 percent in France, 40 percent in the U.K. and 10 percent in Germany and Spain. It had a market share of 12 percent in the U.S. and 7 percent in Russia. Holcim didn’t provide market shares for individual markets.

Holcim now employs 71,000 people in about 70 countries while Lafarge has about 65,000 workers in 64 markets.

News of the discussions lifted construction and materials shares in Europe, helping the Stoxx Europe 600 Index rise to a six-year high. Germany’s HeidelbergCement AG, the world’s third-largest maker of cement, rose 4.3 percent in Frankfurt.

Cost Cuts

Holcim Chief Executive Officer 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.

At 181-year old Lafarge, CEO Bruno Lafont has been slashing expenditure, 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.

Lafarge’s 750 million-euro 4.75 percent notes rose as much as 3 percent to 111 cents on the euro today, Bloomberg data show. Moody’s Investors Service rates Lafarge Ba1 and Holcim two levels higher at Baa2.

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.

Both companies said earlier this year that demand for their offerings is improving amid a global economic recovery. Holcim in February forecast improved cement shipments this year. The same month, Lafarge reported earnings that beat analyst estimates and also predicted rising demand.

“This is traditionally the time when you’d see M&A in these sectors in upswings, when profits and margins are improving,” Cantor Fitzgerald’s Osburn said.