A deal to create the world’s largest cement maker is unlikely to have a major impact in SA, but will give the new company more exposure to the African market.

The world’s two biggest cement producers, Lafarge and Holcim, announced plans earlier this week to sell assets worth $6.9 billion in order to gain regulatory approval for the merger.

Both more than 100 years old, the companies have combined sales of around $44 billion and plan on reaching approximately $1.38 billion annually at earnings before interest, tax, depreciation and amortisation (Ebitda) level through best practices, scale and cross-utilisation of products and services.

The so-called “merger of equals” will be structured as a public exchange offer initiated by Holcim, with an exchange ratio of one Holcim share for one Lafarge share. The offer will see Holcim gaining 53% shareholder control and Lafarge the remainder.

The planned merger received unanimous approval by the companies’ boards and support from core shareholders of both companies. They expect to close the deal in the first half of 2015, subject to regulatory approval.

Competition commissions and antitrust authorities are likely to have a close look at the potential merger, with analysts quoted in the Guardian saying the approval process could take up to two years.

To help secure approval, the companies are selling 10%-15% of the group’s Ebitda, amounting to around $6.9 billion. The majority of the planned divestments will come from Europe, where both Holcim and Lafarge are based, but there are also overlapping operations in India, China, Canada, and Brazil, the companies told reporters during a conference call.

Emerging market reach

LafargeHolcim would be listed on the SIX in Zurich and Euronext Paris, and based in Switzerland. The combined group would have operations in 90 countries and access to both developed and high-growth emerging markets.

The new group would be geographically balanced, the companies said during the conference call, with Lafarge stronger in Africa and Holcim stronger in Latin America.  Emerging markets will account for 60% of sales but no country will represent over 10%.

Elsie Snyman, CEO at consultancy firm Industry Insights, says the merger is good news for Lafarge, as “this will help to expand their access to improved technology and help them to increase their footprint on the African continent where they have been competing against, amongst others, PPC.”

The companies believe the merger will enable them to cut costs and increase efficiencies, achieving savings of $1.9 billion over a three-year period.

This comes as the construction industry struggles to recover from the global downturn, with increased competition and tight margins causing companies to take a firmer view at managing risks.

“Most of the larger organisations have already undergone restructuring to improve internal efficiencies in view of lower turnover and weaker profitability,” says Snyman.

However, she adds that the construction industry, while still in the lower end of the recovery, has shown greater signs of stabilisation.

Local impact

The merger is likely to have more of a global impact than a local one, says Snyman, as Holcim has a mere 2% shareholding in South Africa’s Afrisam.

“Afrisam will more than likely continue operations  as normal although Holcim may or may not decide to disburse of its shareholding in Afrisam.”  Due to the merger’s minimal impact on the South African cement industry, Snyman also doesn’t foresee any problems with local Competition Commission approval.

The new company will have an equally composed board with seven members from Lafarge and seven from Holcim, with Holcim’s Wolfgang Reitzle as Chairman and Lafarge’s Bruno Lafont as the CEO and member of the board.

Current Holcim chairman Rolf Soiron called the merger a “once in a lifetime opportunity”, saying LafargeHolcim would be positioned to take advantage of growth in developed markets and the world’s fastest growing economies.