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Lafarge-Holcim Merger

scasil2003 · 2 · 2235

scasil2003

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on: Apr 07, 2014, 02:37 PM
I've heard from the insider that Lafarge and Holcim would have a forged merger to make LafargeHolcim a merger of equals, with expected revenues of 32 million euros. It's better to put your long term investment on Lafarge for growth.


TSO

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Reply #1 on: Apr 07, 2014, 03:34 PM
If you're going to put up a thread like this, you should at least put up a link to the source.

Anyway, I found an article about it on Reuters. All emphases mine.



Quote
PARIS, April 6 (Reuters) - The world's two largest cement makers, France's Lafarge and Holcim of Switzerland, have agreed the terms of a merger that would create a company with a market value of around $55 billion, a source close to the deal said on Sunday.

Such a merger, achieved by Holcim buying Lafarge, would be the industry's biggest-ever tie-up and create an entity with combined sales of over $40 billion, raising the likelihood it will draw extra scrutiny from global competition watchdogs.

The boards of Lafarge and Holcim approved the proposal on Saturday and are due to announce it on Monday, the source said. The two groups have already begun to address possible competition concerns that would arise, the source added.

"The boards met yesterday and approved the proposal," the source said. "An official communication is due on Monday."

Lafarge declined to comment. Holcim was not immediately available for comment. Both firms are likely to be counting on support from major shareholders. More than a third of Lafarge stock is own by two investors who are represented on its board.

The two companies had already issued statements on Friday announcing they were in advanced talks to merge, a deal which would help them slash costs, trim debt and better cope with the soaring energy prices and weaker demand that have hurt the sector since the 2008 economic crisis.

Their share-price levels jumped to four-year highs on the news, lifting the entire cement sector. A merger would take out spare capacity and help consolidate the market, analysts said.

The terms of the transaction, reported by French newspaper Le Figaro and confirmed by the source, will see Holcim launch a public takeover for Lafarge payable in shares. If successful, the combined firm will be based in Switzerland but will have operational headquarters in Switzerland and France.

Lafarge Chief Executive Officer Bruno Lafont will become CEO of the combined entity while the chairman will be Swiss.

Investment-bank Rothschild and boutique firm Zaoui & Co - helmed by veteran deal-making brothers Michael and Yoel Zaoui - are advising Lafarge, while Goldman Sachs is advising Holcim, according to two sources close to the deal.

Holcim and Lafarge are close in size, with the former's market capitalisation at $30 billion and the latter's at $25 billion. They each have an enterprise value - which includes debt as well as equity - at around 10 times earnings before interest, tax, depreciation and amortisation (EBITDA).

However, in share-price terms, Lafarge enjoys a more expensive valuation with a price-to-earnings ratio of around 33 versus Holcim's 20.5, according to Reuters data. Lafarge's stock is up 18 percent this year. Holcim's is up around 20 percent.

Both companies have high-profile billionaire backers, according to data compiled by Thomson Reuters.

Switzerland's Thomas Schmidheiny and Filaret Galchev from Russia control a total of 31 percent of Holcim, while Lafarge's two biggest shareholders are Groupe Bruxelles Lambert - holding company of Belgium's Albert Frere - and Egyptian tycoon Nassef Sawiris. The Thomson Reuters data show GBL and Sawiris own a total of 37 percent of the French firm.

COMPETITION CONCERNS

Any deal is likely to draw scrutiny from global competition watchdogs, as a Lafarge-Holcim combination would have a dominant position in both Europe and the United States.

Both companies have significant and overlapping capacity in countries such as France, Germany, Spain, the Czech Republic, Romania and Serbia, according to Morningstar analyst Elizabeth Collins.

Analysts have also pointed to Canada and Brazil as other markets where the new entity would have a dominant position.

The companies are already working to address possible antitrust concerns, the source said, without elaborating.

Regulators would probably require the companies to shed some cement plants and distribution facilities before approving any merger.

Lafarge's 2013 merger with Tarmac, Anglo American's British business, was approved by British antitrust authorities only after both agreed to sell a significant number of assets.

Holcim and Mexican rival Cemex also announced plans in August to exchange some assets and combine others in Europe. European Union antitrust regulators are investigating aspects of the deal and whether it will reduce competition and result in higher prices for consumers.

POST-CRISIS PLAN

A merger could put pressure on major global competitors such as Cemex as well as Germany's Heidelbergcement and Anhui Conch Cement of China.

The merger plan comes after both Lafarge and Holcim took on debt in the past decade to expand in emerging markets, where rapid urbanisation has fed demand for building materials.

Then the U.S. housing bubble burst, Europe sank into a sovereign debt crisis and demand collapsed. Lafarge suffered further when the unrest of the Arab Spring held back the very markets it had banked on with its 8.8-billion-euro ($12 billion) takeover of Egypt's Orascom Cement in 2008.

Meanwhile, energy prices spiked and many plants in the power-hungry industry are now running at a loss or well below their capacity.

Lafarge, whose cement helped build the Suez Canal and Hitler's Atlantic Wall bunkers along France's west coast, employs around 65,000 workers in 64 countries. Holcim, which was founded in 1912, now has about 71,000 employees in 70 countries.

Since the economic crisis, Lafarge and Holcim have both embarked on cost-cutting drives and shed assets to trim debt.

Some analysts said a merger would help Lafarge potentially almost halve its fixed and variable costs, as Holcim has a better credit rating than Lafarge and the group as a whole could benefit from lower borrowing costs.

Lafarge, whose debt is rated as junk by Standard & Poor's and Moody's, aims to regain an investment grade this year. (Additional reporting by Tom Miles in Zurich and Sophie Sassard in London; Editing by Peter Graff)



As the combined market value of the merged company could be at least $50 billion (given that HCMLY and Lafarge are currently worth $30 and $25 million respectively), this is a substantial acquisition ESPECIALLY when Holcim is going to be the survivor entity here.

My comments:
- The transaction will be paid for in HCMLY shares. If Lafarge would be purchased at $25 billion in market cap, that amounts to 1.38 billion new HCMLY shares at the current price of $18.15. That would be a significant level of dilution, with total shares possibly coming up to an estimated 3.01 billion. Of course this'll be offset by the additional sales/profits/etc. But even if they end up adding EUR 1 billion to earnings (FY2012 for Lafarge was very bad, at EUR 500 million), that translates to CHF 1.22 billion today -- just a doubling of their 2013 earnings to CHF 2.45 billion ($2.744 billion). This translates to $0.91 EPS, a current P/E ratio of 20x. Pretty expensive, I say.
- No mention at all of the net value of assets or the real purchase price HCMLY will actually pay. Considering that their NAV in Q2 2013 was E14.86 billion ($20.36 billion today), goodwill would be around $5 billion if Holcim pays $25 billion in shares. And even if they cough up $25 billion, even if Lafarge's cost controls are improved to the point they restore after-tax profits to $1.37 billion, that'd still be a P/E ratio of 18.3x.  If they don't and it sticks to EUR 500 million (approx. $700 million), that'll be a P/E of 35.72.
- I do not expect operational synergies to justify the implicit 36x P/E ratio being paid by Holcim for the merger. We're talking about two multinationals, with their own systems, their own corporate cultures, their own processes. That'll take a while to sort out, and should they fail... well, impairment losses shall come!

Summary:
- Very good for Lafarge management.
- Lafarge owners effectively get paid in Holcim shares rather than cash. Whether this is worth it or not depends on the final purchase price they'll agree on.
- Possibly bad for Holcim owners in the long run.


 


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