LafargeHolcim

LafargeHolcim is the name of the company that would be formed from the merger of cement companies Holcim and Lafarge. The two companies announced they had come to terms on April 7, 2014 and hope to complete the merger by mid-2015. The deal would create the world's largest cement manufacturer in terms of sales and manufacturing capacity. It will require regulatory approval in 15 different jurisdictions. According to analysts, the merger may lead to widespread change within the cement industry.

Overview

On April 7, 2014, the world's two largest cement manufacturers, Paris-based Lafarge and Jona, Switzerland based Holcim, announced they had agreed to terms on a merger. Merger talks, codenamed "cities", had begun in January, with agreement on a "merger of equals" being unanimously approved by the company boards on April 5.^[1][2] Both companies have multiple large stakeholders, necessitating parallel negotiations with those parties to ensure ultimate shareholder approval of the deal.^[2]

Lafarge and Holcim executives hope that the deal, which would create a new company named LafargeHolcim, will be complete during the first half of 2015. The new company's manufacturing capacity of 427 million tons a year would vastly exceed the 227 million ton capacity Anhui Conch, the current industry leader in that category.^[1] Lafarge Chief Executive Officer Bruno Lafont will lead the new company, while Holcim's Wolfgang Reitzle will be chairman.^[3] The merger would entail Lafarge stock being converted into Holcim stock on a 1:1 basis. Former Holcim shareholders would own 53% of LafargeHolcim.^[2] The new company would be based in Switzerland and listed on stock exchanges in both Zurich and Paris.^[1] Their research facilities would remain in France.^[2]

According to Lafarge and Holcim, the deal would save the new company 1.4 billion euros (US$1.9 billion) annually and create "the most advanced group in the building materials industry."^[1] Cost savings will come from divested assets, as well as increased efficiency across a number of departments including IT, maintenance, and general administration.^[3] On an earnings before interest, tax, depreciation, and amortization (EBITDA) basis, the largest savings will come from purchasing (340 million euros) and sales (250 million).^[2]

In 2013, Lafarge and Holcim combined for US$44 billion of sales in cement and related markets such as stone, gravel, and sand.^[1] Their combined 275 million tons of product sold eclipsed the third largest producer, HeidelbergCement, by nearly a 3:1 margin.^[2] They have a combined 136,000 employees across 90 countries.^[2][3] With a combined market value exceeding $50 billion, the merger is the second largest announced in 2014 worldwide.^[3]

Response and regulatory hurdles

The deal will face significant regulatory obstacles, as 15 different jurisdictions could potentially raise objections. Due to the expense of transporting cement, most manufacture is local in nature. As such, a high concentration of market share by one company in a market is of concern due to inefficiency of outside competition. In particular, in the cement market is already tightly consolidated and antitrust scrutiny of deals has been commonplace since the 1970s. A 2008 case investigating all the continent's major manufacturers, including Larage and Holcim, is still as of 2014.^[1] Even so, most analysts surveyed by Reuters felt the merger would be approved in the end. France, Germany, the Czech Republic, Romania, Serbia, Canada, Morocco, and the Philippines were cited as the countries most likely to scrutinize the Lafarge-Holcim merger.^[2]

Holcim chairman Rolf Soiron said the companies would "immediately" begin steps to ease regulatory concerns.^[1] He said they would sell or spinoff assets that generated about 5 billion euros (US$6.9 billion) of revenue in 2013 in areas of large overlap between the two companies. Two-thirds of divestments will be in Europe, with sales also occurring in Brazil, Canada, China, India, and the United States.^[3] The planned divestments account for between 10 and 15% of the companies' current EBITDA.^[2] Proceeds from the divested assets will be used "for the creation of a strong financial structure," according to a spokesperson, although a stock buyback or special dividend was not ruled out.^[3]

Lafont said the merger was aimed at rebalancing operations, not cutting costs. He said overlapping businesses would be sold, not closed, so industry job losses would be minimal.^[1] Lafarge and Holcim feel the deal well better position them to compete in emerging markets which account for a majority of the world's demand for cement. LafargeHolcim would get 60% of its sales from emerging sales, and no one country would account for more than 10%.^[2]

Shares of Lafarge and Holcim surged on April 4 when rumors that a deal was imminent hit the market.^[3] On April 7, Lafarge gained another 2.6%, while Holcim rose 1.6%.^[1] Major Holcim shareholder Thomas Schmidheiny, whose family founded the company, said he was fully behind the merger.^[3] Albert Frère, who owns 21% of Lafarge, also said he would back the deal.^[2]

Analyst Arnaud Palliez said the deal was unlikely to complete on the proposed timetable, remarking "The complexity and ambition of this merger is going to challenge their ability to manage the integration."^[1] He predicted LafargeHolcim would operate more efficiently in Europe after the merger and that the companies' existing businesses in Africa, Latin America, and the Middle East. According the Palliez, the deal could lead to widespread changes in the cement industry as rivals seek out their own mergers or pick up former Lafarge-Holcim assets at cheap prices. He said it could spark an end to the fiscal frugality that has dominated the industry in recent years.^[1] Institute of Mergers, Acquisitions and Alliances president Christopher Kummer said the Lafarge-Holcim deal made sense and predicted it would lead to further mergers within the industry.^[3] Other analysts said the deal would combine Holcim's marketing strength with Lafarge's edge in innovation, while providing significant cost savings, but cautioned "the road to merger clearance will be a long, complex and uncertain one."^[2]

Christian Stadler of the Warwick Business School said the deal was a sign that "mega-mergers" were back in fashion.^[4]

Following the merger announcement, Fitch Ratings reaffirmed Holcim's BBB credit rating and stable outlook. Fitch said the merger would improve economies of scale, diversification, and overall market position. The rating company also said the planned sale of assets could improve the combined company's credit rating going forward.^[5]

Holcim, Lafarge boards met separately to discuss new hurdles to the announced merger

The boards of cement giants Holcim Ltd. and Lafarge SA met separately on Tuesday (March 16 2015) to try to save their proposed $44-billion tie-up, and discussions on both sides hinged on the future of one man: Lafarge Chief Executive Bruno Lafont.

Executives, board members and key shareholders at Switzerland-based Holcim have balked at moving ahead with the merger—one of Europe’s biggest recent deals—if Mr. Lafont, 58 years old, assumes the CEO role of the new company, as originally planned.

Holcim is also demanding new financial terms. France-based Lafarge previously said it was open to tweaking financial terms, but that it won’t go further. A Lafarge spokesman said executives were surprised by Holcim’s objection to Mr. Lafont, and they accuse Holcim of trying to change the terms of the merger without paying a price.

On Tuesday, Lafarge directors met and discussed a possible new role for Mr. Lafont in the combined entity, according to people familiar with the matter. They also discussed other potential CEO candidates for the postmerger company, though the board hasn’t ruled out insisting that Mr. Lafont be the chief executive of the combined company, as originally agreed when the merger deal was announced in July.

Holcim, whose directors also met Tuesday, is open to Mr. Lafont staying with the company in a new capacity, said people familiar with the matter.

In July, the two sides trumpeted a merger of equals, in which Mr. Lafont would take the CEO job and Holcim’s current chief executive, fellow Frenchman Bernard Fontana, would assume the chairmanship of the combined company. Mr. Lafont has long cut a figure in French business circles as a savvy deal maker, orchestrating in 2007, for instance, the purchase of Egyptian cement maker Orascom for €8.8 billion ($9.3 billion.)

The Lafarge-Holcim merger was Mr. Lafont’s boldest move, aimed at bolstering Lafarge in the wake of a world-wide construction slowdown, particularly in Europe. He won respect from the Holcim side in successfully navigating the considerable regulatory hurdles facing the deal, and for moving quickly to sell off assets to prevent antitrust issues, according to people familiar with the matter.

But amid that deal making, the performance of the two companies diverged, raising questions inside Holcim about Mr. Lafont’s stewardship, according to people familiar with the matter. The two sides had promised a combination would save €1.4 billion in annual costs.

Earlier this year, Lafarge reported a fourth-quarter loss of €145 million after writing down the value of its operations in Iraq and Syria. As Holcim outperformed Lafarge, the Holcim side began questioning whether Holcim shareholders should be compensated, according to people familiar with the matter. A special dividend was considered, but it may have drained cash and damaged the combined entity’s credit rating, and the idea was dropped, according to a person familiar with the matter.

The financial balance tilted further when the Swiss National Bank surprised markets in January by letting the Swiss franc float, sending it soaring against the euro and other currencies. Holcim shares, priced in francs, were suddenly worth a lot more euros, the currency in which Lafarge shares trade. The one-for-one share swap ratio enshrined in the original merger deal was looking less and less favorable to Holcim.

Distrust ratcheted up in February, when Lafarge announced it was increasing its dividend, despite weak results. Holcim officials said they weren’t consulted, according to people familiar with the matter. Lafarge said the dividend increase was done in accordance with the merger agreement.

Meanwhile, Holcim officials grew wary that Mr. Lafont was backtracking on some terms of the deal, including trying to renegotiate some executive positions, according to people familiar with the matter. A Lafarge spokesman said executive roles had to be approved by a committee with an equal number of members from both companies.

At the same time, Holcim officials had a hard time warming up to Mr. Lafont personally, according to people familiar with the matter. Mr. Lafont attended two of France’s most elite schools before landing a job at Lafarge in 1983, where he spent the rest of his career quickly climbing through the ranks, taking the top job in 2006.

Some Holcim executives thought Mr. Lafont made few attempts to develop personal relationships with Holcim executives, according to people familiar with the matter.

While he presided over many formal meetings about integration, he rarely met informally, over dinner for instance, in an attempt to bond with his new partners, alienating some at Holcim, some of the people said.

The Lafarge spokesman said Mr. Lafont traveled to Switzerland dozens of times during the integration discussions, and he met often with Holcim executives. He had to refrain from attending nonbusiness events with Holcim executives for antitrust reasons since, until the merger is done, both companies remain competitors, the spokesman said.

The cool demeanor was in line with his leadership style, said Marie-Hélène Meyling, who represents employees on the board of state-controlled power utility Electricite de France, where Mr. Lafont is also a director.

Mr. Lafont is “rather introverted,” she said. “He is mainly a discreet man who doesn’t veer from professional issues during business meetings.” ^[6]

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