Lafarge and Holcim: What brings them closer
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Lafarge and Holcim: What brings them closer

Vikas Damle

As the two cement giants of the world, Lafarge and Holcim, plan to join hands and cut costs, trim debts and beat the market blues felt by the industry since the economic crisis of 2008, we wonder how this biggest ever tie-up in the cement industry will impact the market in India. Will the merger of ACC, Ambuja (both owned by Holcim) and Lafarge change the market dynamics? Or will the impact be restricted more to the foreign markets? And then there is the bigger question, what is driving so many cement companies towards consolidation?

The combined sales from Lafarge and Holcim will amount to CHF 39bn/EUR 32bn and EBITDA to CHF 8bn/EUR 6.5bn. The merger will involve strategic optimisation of portfolio while anticipating regulatory requirements through divestments 10 per cent to 15 per cent of the global EBITDA. No country would account for more than 10 per cent of the combined revenues. LafargeHolcim would be listed on the SIX in Zurich and Euronext Paris. It would continue to be domiciled in Switzerland and would operate under the local governance rules with a board composed of Lafarge and Holcim directors in equal number and through the distribution of central corporate functions in France and Switzerland.

The project is now subject to information consultation process with the relevant employee representative bodies and will be submitted to the approval of the relevant competition authorities. It is expected to be finalised in H1 2015.

Though, we will have to wait for some time before Lafarge talks to us about brand consolidations, new logo, or about its asset disinvestment plans, an interaction with officials at Lafarge did allow us a peek into the company´s expectations from the merger.

Lafarge looks at the planned merger as a way to create the most advanced group in building materials industry as the merged entity would occupy complementary positions. Combined operations would include production sites located in 90 countries across all continents with the most balanced and diversified portfolio in the industry. The merger will create a balanced and diversified global portfolio, well positioned to seize opportunities in high growth countries and to push recovery in developed markets. The combined know-how and expertise will allow the merged entities to be even more innovative.

Concerning synergies, LafargeHocim expects EUR 1.4bn of incremental synergies on a full run-rate basis (in over 3 years), within EUR 1.0bn at EBITDA level through best practices, scale and cross utilisation of innovative products and solutions.

LafargeHolcim expects following annual synergies:
  • CHF 1.7bn/EUR 1.4bn of incremental synergies on a full run-rate basis phased in over three years with one third in the first year
  • CHF 1.2bn/EUR 1.0bn at EBITDA level through best practices, scale and cross-utilisation of innovative products and solutions
  • CHF 240m/EUR 200m in financial savings, and
  • CHF 240m/EUR 200m in capital expenditure optimisation.

    Lafarge is the world leader in building materials, employing 64,000 people in 62 countries with sales reaching C15.2 billion in 2013. The company is one of the top-ranking players in cement, aggregates and concrete businesses in the world. With world´s leading building materials research facility, Lafarge places innovation at the heart of its priorities. Speaking about the merger, Rolf Soiron, Chairman, Holcim said, ´this proposed merger is once in a lifetime opportunity to deliver substantially better. value to customers with more innovation, a wider range of products, solutions, better sustainability and enhanced returns to shareholders. LafargeHolcim will be uniquely positioned to take advantage of growth in developed markets and fast growing economies by supplying the materials that will enable the construction industry to meet the challenges of the future.´

    Holcim is a global leader in the manufacture and distribution of cement and aggregates, ready-mix concrete, asphalt, and associated services. The company holds majority and minority shareholdings in some 70 countries and on every continent. In 2013, Holcim recorded net sales of over 19.7 billion Swiss francs. Bruno Lafont, Chairman and CEO of Lafarge, said that, ´By combining Holcim´s experienced teams, complementary geographies and innovative expertise with ours, we propose to set up the most advanced group in the construction industry, for the benefit of our clients, our employees and our shareholders.´

    He further added that, ´For years, I have had the utmost respect for Holcim. The merger of Lafarge and Holcim will allow the group with strong roots in Europe to enter into a new dimension in our ambition to contribute to building better cities on a global scale and in a sustainable manner.´

    Speaking on alternatives to giving-off assets to ensure a competitive environment, Lafarge´s response is that the competition authorities have a full array of tools to ensure proper competition in their country. The gist of it is: ´Divestments are sometimes required, but also are behavioural remedies in most cases. In the case of this merger project, we will work closely and in full cooperation with the competition authorities where and when relevant, to understand their potential concerns and see how to address them. Keeping in mind that the project is to create the best growth platform in the sector and position our business to meet changing market needs and addressing the challenges of urbanisation. This merger will allow us to combine our know-how and expertise to be even more innovative for the benefit of our customers.ö The rationale of the transaction is very strong, resulting in a significant enhancement of the overall business profile. This merger is an attractive transaction for both the companies and it is reflected in the revised ratings for Lafarge. Standard & Poor´s has changed Lafarge´s rating with a positive outlook on Lafarge to BB+ and Moody´s has rated Lafarge Ba1 under review for upgrade. In addition, both agencies indicated that post merger they would expect Lafarge´s rating to be raised to BBB/A2 with Standard & Poor´s and Baa2 with Moody´s.

    ´This merger could further accelerate consolidations.´
    Sneha Venkatraman
    Research Analyst, HDFC Securities
    ISneha Venkatraman, Research Analyst at HDFC Securities elaborates on how the planned merger may affect market dynamics here in India.

    How do you see the Lafarge-Holcim merger impacting the cement market in India and abroad?
    If the combined entity proposes to merge all India operations under one roof, LafargeHolcim, it will have a massive ~70 mtpa domestic capacity, beating UltraTech Cement´s 57 mtpa capacity. The entity will have a better regional distribution with only ~14 per cent exposure to supply surplus in southern region and a healthy 38-40 per cent share in the lucrative eastern market. The combined entity will have ~20 per cent share at an all India level. This calculation is based on an assumption that the CCI will not insist on divestment of certain assets when the two combine.

    Post this potential merger, the new entity could emerge as the clear leader in the Eastern and Northern markets of India and a close second to UltraTech in the western market. Lafarge is a relatively new entrant and mostly concentrated in the eastern part of the country. It could gain from a merger with ACC and Ambuja, which are older and more established brands in India. Lafarge could also benefit from lower financing costs as Holcim currently has a better credit rating than Lafarge.

    This merger could further accelerate consolidations in Indian cement industry, where the current top two players may become aggressive to maintain their market share. Post the consolidation of Lafarge India and Holcim India, the top five players are likely to hold around 50 per cent of the market share of the cement industry after considering incremental capex. The consolidation of the cement industry is in the hands of several well-established industry leaders and may unleash competitive pressure in the cement industry, thereby keeping a check on prices. Smaller players could feel the heat unless they fall in line with the pricing and supply dynamics of the regional leaders.

    How will the merger affect the credit ratings of Lafarge?
    Lafarge India enjoys AA/A1+ ratings from Crisil. Internationally, the parent company, which has a lower rating, could benefit from this merger with Holcim. Holcim has a stronger balance sheet and a better credit rating than Lafarge and this would enhance Lafarge´s credit profile.

    ´Brand leaders will have to join hands, consolidate and grow.´
    Ashutosh Rampal
    VP Marketing, KJS Cement
    In the last financial year we saw a slew of acquisitions and consolidations. Ashutosh Rampal, VP Marketing, KJS Cement, talks about the need to join hands.
    Would Lafarge Holcim merger impact the cement market in India?
    Lafarge and Holcim are both leading and well established players in the market. They have overlapping capacity in North India to some extent, but since the capacity is not too large in this region there wont be any significant impact. I believe that the brands would continue to remain separate. The Indian cement market may remain neutral to this merger.

    It will be more of a merging of balance sheets.
    We saw several mergers and consolidations in the last financial year. What is driving these consolidations and when can we expect organic growth?
    I think that we will continue to see more acquisitions and mergers and less of organic growth for next few years. The market has two types of players those who sell cement as commodity (push marketing) and others who drive sales by branding (pull marketing). Today land acquisition is a big challenge making it difficult to set up a new facility. As the market becomes more and more competitive, the commodity sellers will find it difficult to sustain, while the brand leaders will have to join hands, consolidate and grow. Companies are merging to achieve operational efficiencies and to leverage economies of scale.

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