PARIS/ZURICH — Holcim of Swizerland unveiled a deal to buy France’s Lafarge on Monday to create the world’s biggest cement maker, with $44 billion of annual sales, and launch asset sales worldwide to steer it over antitrust hurdles.
The partners billed the industry’s biggest ever tie-up as a merger of equals, under which Lafarge shareholders receive one Holcim share for every Lafarge held and Holcim investors end up with 53 percent of the new group. The merged business will be based in Switzerland and listed in Zurich and Paris.
As the two biggest listed companies in the sector already, with operations in 90 countries, the pair expect to face antitrust scrutiny in 15 jurisdictions and to sell some $6.85 billion of assets to persuade competition regulators to allow the creation of LafargeHolcim.
The deal will give the group a market value of close to $60 billion. It will help it slash costs, trim debt and better cope with the soaring energy prices, tougher competition and weaker demand that have hurt the sector since the 2008 economic crisis.
It would bring together Holcim’s strength in marketing with Lafarge’s innovative edge and could generate substantial savings — provided that necessary asset sales, according to analysts, which may take several years, do not deplete that potential too much.
David Anderson of the Berwin Leighton Paisner law firm:
“The road to merger clearance will be a long, complex and uncertain one.”
Antitrust enforcers will take a hard look at the deal because of a history of collusion in the cement industry, according to Herbert Hovenkamp,a professor on antitrust law at the University of Iowa’s College of Law.
Lafarge was fined by European antitrust regulators for price-fixing in 1994 and in 2002. The European Commission opened another investigation into several cement producers in December 2010, with Lafarge and Holcim being among the probed companies.
Regulators could block the merger, according to analysts, but most expect the deal to go through.
Two-thirds of divestments are expected to affect Western Europe, but there are also overlapping operations in India, China, Canada and Brazil, according to Lafarge Chief Executive Officer Bruno Lafont. Lafont is expected to run the combined group.
The talks, which began in earnest in January, had been complex because both companies have shareholders with very large individual stakes, with whom a parallel set of negotiations had to be conducted, according to sources close to the talks.
Core investors backed the deal, according to both companies.
The negotiations, codenamed “Cities” to reflect the theme of construction, was helped by conductive market conditions and the fact that the fact that the companies were similar in size.
Both companies expect the total annual savings from joining forces of $1.93 billion over three years, thanks to economies of scale, better operational efficiency and lower financing costs.
Emerging Market Push
The deal comes after both companies took on big debts in the past decade to expand in emerging markets, where rapid urbanization has fed demand for building materials. The bursting of the U.S. housing bubble and the euro zone debt crisis caused markets to slump, however, and they both embarked on cost-cutting drives and started shedding assets to trim debt.
A combined LafargeHolcim will be better able to fend off growing competition from rivals in emerging markets, including Mexico’s Cemex and China’s Anhui Conch, which overtook Lafarge as the world’s top cement maker by volume last year, although not in revenue or market value.
Lafarge and Holcim together sold around 275 million tons of cement last year — nearly three times more than their closest listed rival, Germany’s HeidelburgCement, according to Aurel BGC analysts.
The groups complement each other geographically, according to company executives, with Lafarge strong in Africa and Holcim strong in Latin America. Emerging markets will account for 60 percent of sales; no country will represent over 10 percent.
“LafargeHolcim will be present worldwide in a balanced way.”
Lafont also stressed that while its headquarters would be in Switzerland, it would have roots across Europe.
Holcim Chairman Rolf Soiron at a joint news conference in Paris:
“If we can’t create global champions in Europe, then we’re defeated. And we can only create European champions if we manage to go beyond traditional frontiers.”
Lafarge and Holcim confirmed that they would sell businesses worth 10 to 15 percent of the group’s earnings before interest, tax, depreciation and amortization (EBITDA) to satisfy antitrust concerns — or about $6.9 billion in total.
“We are immediately going to start discussions with the European Commission and other competition regulators in a constructive spirit.”
Lafont added that the group would set up a committee specifically devoted to divestments.
The merger has been discussed with France’s Socialist government and there will be no plant closures tied to the deal, according to Lafont. The group’s research center will be in France, Lafarge’s home country, and there will be only a very limited impact on jobs there, according to Lafont.
France, Germany, the Czech Republic, Romania, Serbia, Canada, Morocco and the Philippines have been cited as areas where antitrust authorities would press for the biggest disposals.
The U.S. cement market is not concentrated, so U.S. antitrust regulators will likely review the deal’s effects on regions as small as a few counties, according to Andre Barlow, an antitrust expert with the law firm Doyle, Barlow and Mazard PLLC.
Cement is a low-value, heavy product, so markets tend to be geographically small.
All signs point to the likelihood that the companies and U.S. regulators will come to an agreement on asset sales that allows the deal to close, according to Barlow.
Synergies at EBIRDA level were made up of $275.9 million at operational level, $469 million in purchasing, $344 million in sales and $275 million for investments.
The transaction won the support of core shareholders and was expected to close in the first half of 2015. They both have high-profile billionaire shareholders in Belgium’s Albert Frere, Egypt’s Nassef Sawiris, Switzerland’s Thomas Schmidheiny and Georgia’s Filaret Glachev, according to both companies.
Frere’s holding company Group Bruxelles Lambert, which has a 21 percent stake, said it would support the deal and would hold about 10 percent in the combined group after the transaction was completed.