Speculation has been rife over the outcome of the LafargeHolcim merger. Among the top discussions is who will get what when the necessary assets are divested.
In an article on the Wall Street Journal website, Deutsche Bank indicates divestments that will need to be made in order for the combined market share of Holcim and Lafarge to be below 40% in each country. In all, there are eight countries in which the companies, combined, hold more than 50% of the market. In Ecuador, the companies will need to shed 53% of their capacity, according to the article. In the Philippines, that figure is 50%, in Serbia it’s 48%, 47% in Morocco, 43% in Romania, 36% in Hungary, 26% in France and 23% in Canada. Deutsche Bank also refers to 12 additional countries where ‘meaningful increases’ in market share are expected, which could create issues with local competition authorities.
Majors keep quiet over acquisition plans
The expectation is that existing players will ‘bulk up’ by acquiring the divested assets. In his report on the deal, Imran Akram comments: ‘In the past, large sector M&A would typically come in clusters of several transactions. Emerging market cement groups have a perfect opportunity to either buy into the MNC’s, or pick up disposal assets from Lafarge-Holcim. 2014 just became a lot more exciting for the global cement sector!’
Thus far, the competing majors are mostly keeping quiet. BDLive reports that Cemex is unlikely to take up the opportunity due to it heavy debts. Fernando Bolanos, an analyst at Monex, told the newspaper: “We don’t see Cemex being able to buy something. Its level of leverage is something that blocks it…Nor do we see it as a buy-out target.”
Cemex was left in a difficult position during the financial crisis, having spent more than US$16 billion on Australia’s Rinker just previous to the crash. The Mexican group reported net debt of US$16.3 billion at the end of last year with a higher than average ratio of net debt to EBITDA of 6.2 and limited cash flow. Its financing agreements limit its possibilities for expenditure and its credit ratings are reportedly four levels below investment grade, which it is working towards regaining in 2016. BDLive also reports that a consultant familiar with the company expects Cemex to look at assets in Brazil and Canada and to ‘shy away’ from Asian markets. Meanwhile, Cemex Chief Executive Lorenzo Zambrano told a shareholder meeting in March, “We think there are some areas in Southeast Asia where we could take part and some markets have been growing fast, like the Philippines and Colombia, and we are investing there”.
Irish building materials group CRH has also been suggested as a potential buyer for divested assets, but the group hasn’t yet spoken of its plans. The group is undergoing its own refocusing programme, selling off assets that no longer fit with its business plan. However, British company Breedon Aggregates has said it could potentially be interested in adding UK assets. “The deal is a long way off completion, but we’re certainly interested in principle,” a spokesperson told City A.M. “They’d have to be at the right price and add value to our company.” Fellow UK company Hope Construction Materials is also reported to be interested in the opportunities presented by the merger.
In Malaysia, analysts speculate that Holcim Malaysia could be merged with Lafarge Malaysia. The Sun Daily quotes a Maybank IB Research report, which states: ‘We believe there is a possibility that Holcim Malaysia could be injected into Lafarge Malaysia over the longer term given that there is minimal overlapping of business (in terms of geography) and there will be increased efficiencies in streamlining the Malaysian operations’.
Lafarge Malaysia is the dominant player in Peninsular Malaysia with about 40% market share. The merger would increase total market share to 44%. The report adds: ‘We estimate that the combined earnings before interests, tax, depreciation and amortisation (EBITDA) of Lafarge Malaysia and Holcim Malaysia accounts for just 2% of LafargeHolcim’s total EBITDA. Hence, we think there is no need for the parents to dispose any of the Malaysian assets.’ A local Lafarge spokesperson told the newspaper that all negotiations are being carried out at a global level.
Meanwhile, Fitch Ratings has placed Lafarge’s ‘BB+’ Long-term Issuer Default Ratings and senior unsecured bonds on Rating Watch Positive following the merger announcement, reflecting its expectations that the IDR could be upgraded following the merger. In a statement, the ratings agency said that an upgrade would depend on the combined entity’s financial profile and group structure.
Written by Katherine Guenioui
Read the article online at: https://www.worldcement.com/europe-cis/09042014/speculation_continues_over_lafarge_holcim_merger_23/