LafargeHolcim: Becoming Reality – Part One

The LafargeHolcim merger became a reality in July 2015, creating the world’s undisputed global market leader in cement, with 115 000 employees in 90 countries. The merger will allow the two groups to recover ground lost since 2007, with asset disposals leading to a reinvigorated balance sheet. The sector implications are immense. The disposal of LafargeHolcim assets has created another substantial force in cement, with Irish building materials group CRH transformed into a major global cement producer. Cemex plans asset disposals of US$1 – 1.5 billion, in a move partly inspired by the LafargeHolcim disposal process. HeidelbergCement has rolled out a new financial strategy as its balance sheet strengthens. IA Cement expects a step-up in cement sector M&A transactions on the back of this deal. This article reviews the merger of LafargeHolcim, the enlarged cement presence of CRH, and sector implications of the transaction.

Changing the shape of the industry

This is a game-changer for the cement industry. LafargeHolcim will be a powerful force to be reckoned with. In 2014, the combined group boasted a cement capacity of 386 million t with sales of 263 million t in cement, 288 million t of aggregates and 57 million m³ of ready mixed concrete. After substantial asset disposals in India and to CRH, the company will still boast annual sales of US$27 billion with EBITDA of US$6 billion. Cost savings are being projected at €1.4 billion over three years.

LafargeHolcim will also be a much stronger entity than the two separate companies, which have endured years of cost cutting at Holcim and cost cutting and disposals at Lafarge. The key debt/EBITDA metric, which was uncomfortably high at the 3 – 4x level for both companies pre-merger, will fall below 2x. This calculation is based on the completion of the CRH and Indian disposals. The future is promising too – there are significant projected synergies over the next three years and the turnaround potential in Europe/US alone is substantial. Consequently, group EBITDA is likely to be close to US$9 billion after a three-year period.

There has been discussion that LafargeHolcim will concentrate on reducing debt and returning money to shareholders once the merger is complete. However, a more likely outcome will be a growth in profit from cost synergies and market recovery leading to enough cash flow to provide a mixture of growing dividends/share buybacks, further acquisitions/expansionary Capex, and potentially further paydown of debt. Both companies have already restricted expansionary Capex in recent years. The merged group is looking to adopt a tighter capital allocation policy, creating a more selective process and avoiding large acquisitions. Nevertheless, IA Cement expects net investments to increase as profits recover.

Merging cultures, creating synergies

The announcement of the LafargeHolcim merger was originally met with plenty of scepticism, both from the industry and financial markets. This centred on anti-trust issues, cultural fit and industrial logic. The disposals (completed and pending) have taken care of the anti-trust issues, while the other two areas remain unproven. IA Cement believes that the combination has a strong logic – LafargeHolcim becomes the clear global cement leader, a position that Lafarge and Holcim individually were struggling to hold against fast-growing competitors in emerging markets. The revitalised balance sheet will pave the way for renewed expansion, after years of cost-cutting and/or asset disposals. Centralisation will also create the scope for considerable savings.

The two immediate challenges facing LafargeHolcim will be integration and delivering the promised savings. The group targets annual savings of €1.4 billion phased in over three years. Factoring in the asset disposals, this figure represents more than 5% of sales. This is higher than the 1.5 – 2.5% typically seen in the sector. Implementation of the synergies will cost €1 billion and LafargeHolcim expects the following breakdown:

• €1 billion in operational synergies – LafargeHolcim expects to save €0.2 billion by adopting best practise in the areas of logistics, distribution, IT and energy use; €0.34 billion from procurement; €0.25 billion from SG&A savings by reducing duplication and consolidating corporate overheads; and €0.2 billion saved through the use of innovation and cross-selling. The two companies have announced job cuts in central functions – a key phase in the creation of the LafargeHolcim group – amounting to 120 positions at Holcim and 380 at Lafarge.
• €0.4 billion of financing and Capex savings – the group believes €0.2 billion can be saved through lower interest charges and a further €0.2 billion through the application of best practices in maintenance capital expenditure. Financial synergies should come quickly – Lafarge has a series of bonds where a return to an investment-grade credit rating would trigger a reduction in coupon interest.

The group will have four billionaire shareholders – Thomas Schmidheiny and Filaret Galchev from Holcim, and Albert Frere and Nassef Sawiris from Lafarge. Three of these billionaires have board seats and supported the merger, while relations with Mr Galchev are less clear. Keeping all four satisfied will be a challenging task for LafargeHolcim management. After the merger, the billionaires will have the following LafargeHolcim shareholding: SCIA (Schmidheiny) 11.22%, GBL (Frere) 9.3%, NNS (Sawiris) 6.15% and Eurocement (Galchev) 6.04%.

The compatibility of the cultural fit will become clear after the two groups merge. Historically Lafarge always had a more centralised approach than Holcim. Holcim’s top management underwent wholesale changes after the 2012 retirement of Markus Akermann and appointment of Bernard Fontana.

The Board of Directors and the Executive Committee are comprised equally of Lafarge and Holcim managers. The merger was initially based on a 1:1 ratio, but this was later altered in favour of Holcim. On 1 June, Holcim launched a public exchange offer for Lafarge shares, at an exchange ratio of 9 Lafarge shares for every 10 Holcim shares. This offer was open for 25 trading days. The new group will be led by Eric Olsen as CEO and Thomas Aebischer as CFO. Note that Eric Olsen was involved in integrating the Blue Circle and Orascom acquisitions. The need to change the CEO from Bruno Lafont to Eric Olsen raised several question marks about the cultural fit.

This is part one 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.