LafargeHolcim: Becoming Reality – Part Two

LafargeHolcim announced significant asset disposals to facilitate the merger. Proceeds will be close to €8 billion on completion. The bulk of the assets were sold to CRH, which is paying €6.5 billion for assets that include 36 million t of cement capacity as well as annual sales of 79 million t of aggregates, 8 million t of asphalt and 10 million m³ of ready-mixed concrete. Based on 2014 figures, CRH paid 1.25x EV/sales and 8.7x EV/EBITDA. LafargeHolcim also sold US assets, comprising one cement plant, and a number of terminals and slag grinding units. Most of the assets were sold to Summit Materials for €420 million at 10x EBITDA. At the time of writing, LafargeHolcim is undergoing a disposal process in India of circa 5 million t of Lafarge cement assets. Press reports suggest a price tag of close to US$1 billion. In addition, both Lafarge and Holcim have made further asset disposals on a standalone basis, with Holcim selling assets in Thailand and Lafarge in Pakistan, Mexico and Russia.

The LafargeHolcim deal has helped to ignite M&A activity in the global cement sector. The current economic picture – slow growth combined with low interest rates – is an investment banker’s dream. Several cement majors have made announcements:

• HeidelbergCement has announced a new strategy, following improvements to its financial health. The group plans to increase dividends, return to an investment-grade credit rating, and increase investments. HeidelbergCement plans to increase Group revenue from €12.6 billion in 2014 to more than €17 billion by 2019. Operating EBITDA is expected to grow from e2.3 billion to more than €4 billion. The Group projects cumulative free cash flow of about €8.8 billion from 2015 – 2019. From this amount it expects to invest €2.5 billion in organic growth, €1 billion to reduce leverage and support an investment-grade rating, and €2 billion for dividends, raising the pay-out ratio from 29% to 40 – 45%. Further cash is for M&A or might be returned to shareholders.
• Cemex has announced that it will aim to raise US$1 – 1.5 billion from asset disposals. The main driver has been to return to an investment-grade credit rating. The sale could take the form of simple asset disposals, or a more creative option such as the sale of a further stake in the 73%-owned CLH (Cemex Latin American Holdings). Cemex CEO Gonzalez has commented to investors that the LafargeHolcim asset disposal process had illustrated buyer appetite. At the same time Cemex is also planning new investment programmes in Mexico and the Philippines to upgrade capacity.
• Italcementi has made long-awaited changes to simplify its shareholder structure. In mid-2014, the group merged the Italcementi ordinary and savings shares, raised e500 million in new equity and bought out the minorities in Ciments Francais. This dramatically simplifies the shareholder structure and brings the Pesenti family ownership down to 45%.

IA Cement expects more M&A transactions, as well as partnerships and potential asset swaps to follow. Emerging market cement giants are increasingly looking to diversify overseas, and the surprising drop in demand in the early months of 2015 in several large markets (China, India, Brazil, Indonesia) may accelerate the push abroad. For example, there are press reports that Camargo Correa of Brazil is looking at selling a 10 – 18% stake in its overseas cement business, Intercement, with an aim to raising US$1.2 billion. For the leading players in China, the Latin American groups (Camargo, Votorantim and Argos), or the Asian groups (Taiheiyo, Siam Cement, Semen Indonesia and Ultratech), this is a good time to explore entering new markets.

The LafargeHolcim asset disposal process has also sparked considerable sector interest from private equity groups. Several large companies carried out a lot of work on the cement sector and are frustrated at losing out to CRH for the LafargeHolcim assets. They have access to capital, no anti-trust restraints, and many characteristics of cement are well-suited to the private equity space. Private equity is well-placed to partner with the highly-indebted multinationals.

According to IA Cement estimates, CRH will jump from world number 20 in the cement rankings to 11th place on the back of the deal for LafargeHolcim assets. This makes the Irish group a much more powerful force in the cement industry. It will acquire 36 million t of cement capacity, from which Lafarge and Holcim made 23 million t of sales in 2014. This will more than double the group’s position in cement.

In addition, CRH is exploring further expansion. It has been able to limit the strain placed on its balance sheet by the LafargeHolcim deal by raising €1.6 billion in fresh equity from investors, as well as stepping up the pace of non-core asset disposals, which has yielded €0.9 billion in the last year. Its total disposals target is €1.5 – 2 billion. CRH net debt/EBITDA is expected to revert towards the comfortable 2x level by 2016. According to press reports, the group is also in talks to buy a majority stake in the distressed Tongyang Cement of South Korea for €800 million. In addition, CRH is one of several parties mentioned in press reports as bidding for the Lafarge Indian assets. 

Conclusion

The LafargeHolcim merger creates a very powerful force in the cement industry. The breadth of their presence – across 90 countries – means that the merger affects almost every single cement market and company. LafargeHolcim may face issues with the cultural fit and the extent of the cost savings promised to the market, but this does not detract from the other strengths of the deal. Contrary to popular expectation, IA Cement expects LafargeHolcim to be aggressive in expansion over the next three years as a profit recovery boosts cash flow. Global cement M&A is recovering from moribund levels, and is likely to enjoy healthy activity particularly among the multinationals. As a result, IA Cement expects rapid further changes to the shape of the industry in the near future.

This is part two of a two-part article written by Imran Akram, IA Cement, for World Cement’s August issue and abridged for the website. Subscribers can read the full issue by signing in, and can also catch up on-the-go via our new app for Apple and Android. Non-subscribers can access a preview of the August 2015 issue here.

Read the article online at: https://www.worldcement.com/special-reports/04082015/lafargeholcim-becoming-reality-part-two-257/