Cement groups Lafarge, Holcim in $50bn-plus merger talks

Reuters - UK Focus

* Merged group would have market value of over $50 bln

* A merger could help cut costs for both indebted groups

* Any deal could raise major anti-trust concerns (Adds detail on both companies, context)

By Natalie Huet and Alice Baghdjian

PARIS/ZURICH, April 4 (Reuters) - The world's two largestcement makers, France's Lafarge (Munich: CIL.MU - news) and Switzerland'sHolcim (Other OTC: HCMLF - news) , are in advanced talks to merge into a companywith a stock market value of over $50 billion in what would bethe industry's biggest ever tie-up.

The discussions, which are likely to draw close scrutinyfrom European competition watchdogs, are "based on principlesconsistent with a merger of equals", the two companies said inidentical statements on Friday.

They said no agreement had yet been reached and that therewas no guarantee of a deal, but there was a "strongcomplementarity" and "cultural proximity" between the groups.

A merger would help Lafarge and Holcim slash costs, trimdebt and better cope with the soaring energy prices and weakerdemand that have hurt the sector since the 2008 economic crisis.

But any deal is likely to draw scrutiny from Europeancompetition watchdogs, as a Lafarge-Holcim entity would have adominant position in both Europe and the United States.Regulators would probably require the companies to shed cementplants and distribution facilities before approving any merger.

Such a merger would create a giant with combined sales ofover $40 billion and would be Europe's biggest tie-up this year,Thomson Reuters (Frankfurt: TOC.F - news) data shows, based on the cost to acquire thetarget and assuming that Lafarge, with the smaller market value,is the target company.

Shares in Lafarge and Holcim jumped to four-year highs onthe news, lifting the entire cement sector.

"It's good for the market," said Clairinvest fund managerIon-Marc Valahu. "There's overcapacity and they need toconsolidate their balance sheets."

Geographically, Lafarge and Holcim could complement eachother well, said Natixis (Paris: FR0000120685 - news) analyst Abdelkader Benchiha. Lafargehas a strong presence in Africa and the Middle East, whileHolcim is strong in Latin America.

But a merger could take several years to come through, hewarned: "There would be potential antitrust problems in theU.S., Canada, Brazil and France, where a Lafarge-Holcim entitywould have a dominant position."

Lafarge's 2013 merger with Tarmac, Anglo American (LSE: AAL.L - news) 's UK business, was only approved by British antitrust authoritiesafter both agreed to sell a significant number of assets.

Holcim and Mexican rival Cemex also announcedplans in August to exchange some assets and combine others inEurope. European Union antitrust regulators are investigatingaspects of the deal and whether it will reduce competition andresult in higher prices for consumers.

PERFECT STORM

Lafarge, whose cement helped build the Suez Canal in the1860s and the Nazi bunkers that dot France's Atlantic (Frankfurt: 98S.F - news) coast,employs around 65,000 workers in 64 countries. Holcim, which wasfounded in 1912, now has about 71,000 employees in 70 countries.

Both companies have significant and overlapping capacity incountries such as France, Germany, Spain, Czech Republic,Romania and Serbia, said Morningstar (NasdaqGS: MORN - news) analyst Elizabeth Collins.

Lafarge estimates in its annual report that it has a cementmarket share of 40 percent in the U.K., 34 percent in France, 33percent in Canada and 12 percent in the United States. It goesabove 30 percent in several east European and African countries.

Both Lafarge and Holcim took on a big pile of debt in thepast decade to expand in emerging markets, where rampanturbanisation has fed demand for building materials.

Then came a perfect storm. The U.S. housing bubble burst,Europe sank into a sovereign debt crisis, and demand collapsed.Lafarge further suffered when the Arab Spring sparked unrest inthe 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 thispower-hungry business are now running at a loss or well belowtheir capacity.

SLASHING COSTS

Lafarge and Holcim have since embarked on a cost-cuttingdrive and shed assets to trim debt. At Holcim thebelt-tightening even affects the CEO, Bernard Fontana, known tostick to economy class on short-haul flights.

Natixis's Benchiha estimates a merger would help Lafargenearly halve its fixed and variable costs. Holcim has a bettercredit rating than Lafarge and the group could benefit fromlower borrowing costs, he said.

Lafarge, whose debt pile has drawn "junk" ratings fromcredit rating agencies Standard & Poor's and Moody's, aims toregain an investment grade by year-end.

Shares in Lafarge jumped 8.9 percent and were the topgainers on the French blue-chip CAC 40 index. Holcimstock rose 6.9 percent. Holcim stock trades at 16.3 timesforecast earnings, a discount to Lafarge's 18.0 times.

Shares across the sector rose on news of the merger talks,on anticipation that the groups may have to divest assets thatcould boost smaller players.

Germany's HeidelbergCement (Other OTC: HDELY - news) closed up 4.3 percent,the leading gainer on the DAX top-30 index. Shares inIreland (Other OTC: IRLD - news) 's CRH (Irish: CRG.IR - news) and Italy's Buzzi Unichem andItalcementi (Milan: IT.MI - news) also rose. Shares in Cemex were 3.8 percent higher in Mexico City.

($1 = 0.7303 Euros) (Additional reporting by Sudip Kar-Gupta in London, AlexandreBoksenbaum-Granier and Blaise Robinson in Paris, Oliver Hirt inZurich; Editing by James Regan, Sophie Walker and MarkTrevelyan)

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