Lafarge Investor Skepticism Surges as Holcim Merger Threatened

As Holcim Ltd. seeks better terms for its planned deal with Lafarge SA, fading confidence that the world’s biggest cement merger will happen is pushing investors to protect their money.

The cost of bearish Lafarge contracts jumped to an almost two-year high versus bullish options on Monday, data compiled by Bloomberg show. The stock slumped the most since November 2011 and lost another 2.5 percent on Tuesday.

Disagreements over the leadership and financial terms of the merger are threatening the $40 billion deal, and investors are focusing on hedging against more declines in Lafarge shares. The French company stands to be the bigger loser if the deal falls apart as it would face increased competition from Holcim, whose revenue and cash from operations have dropped less since the combination was announced last April.

“Investors who have large positions long Lafarge and short Holcim are looking to further hedge themselves now against a break,” said Ben Kelly, an event-driven analyst at Louis Capital Markets in London. “It may be difficult to unwind everything in the market so investors are looking at ways to protect themselves, and using puts is one way to do that pretty effectively.”

Trading of bearish Lafarge options on Monday was three times greater than its one-month average and almost 11 times more than call volume, data compiled by Bloomberg show.

While 927 Holcim puts changed hands -- more than calls -- the volume of bearish contracts was lower than the average for the past month.

Holcim said it won’t pursue the planned combination in its present form, pushing Kepler Cheuvreux to cut the chances of the merger happening to below 50 percent from 95 percent.

Performance Gap

A performance gap between the two companies has fueled concern about the deal’s structure among Holcim investors. The Swiss company wants Lafarge to accept a stake of less than the initially agreed 47 percent in the combined business and is pushing for another leader than Lafarge Chief Executive Officer Bruno Lafont, according to people familiar with the matter.

Lafarge, in turn, said it’s willing to compromise on the deal’s exchange ratio, not on leadership.

Traders who speculate on mergers and acquisitions are betting that Holcim will succeed in lowering the amount that Lafarge shareholders will receive in a merger of the two companies.

Share Swap

The initial deal called for Holcim to swap one of its shares for each Lafarge share. Now, the Swiss company wants to cut that to 0.875 a share for each of Lafarge’s, according to people with knowledge of the matter. The lower ratio values Lafarge at about 60.03 euros a share, and the stock trades at 59.43 euros.

Lafarge has indicated it is willing to accept 0.93 of a Holcim share, which would value the Paris-based company at about 63.80 euros, well above the stock price.

“Until yesterday, we believed the deal would go through,” Josep Pujal, an analyst at Kepler Cheuvreux wrote in a note dated March 17. He still has a buy rating on Lafarge. “We also thought that the question of the 1:1 exchange ratio was a minor issue. However, it seems to have increasingly become a stumbling block. Moreover, if Lafont’s position as CEO of the new group is now in the balance, the chances of a deal may have taken a further knock.”

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