Tags: holcim | lafarge | merger terms | deal

Holcim, Lafarge Dispute Over Merger Terms Threatens Deal

Monday, 16 Mar 2015 08:32 AM


Holcim Ltd. and Lafarge SA’s plan to create the world’s biggest cement company is at risk of unraveling as both sides disagree over the leadership and financial terms, placing the future of the $40 billion merger in jeopardy.

Switzerland’s Holcim said it won’t pursue the planned combination in its present form and wants Lafarge to accept a stake of less than the initially agreed 47 percent in the combined business. Holcim is also pushing for another executive than Lafarge Chief Executive Officer Bruno Lafont to lead the new entity, according to people familiar with the matter. Lafarge, in turn, said it’s willing to compromise on the deal’s exchange ratio, though not on leadership.

“The chance of collapse is big,” said Patrick Appenzeller, an analyst at Baader-Helvea in Zurich. “The longer it takes, the more likely it is that at some point it will be too long.”

Since the combination was announced to great fanfare almost a year ago, Holcim has outperformed Lafarge on everything from sales to profit, prompting some investors in the Swiss company to criticize Lafont and call for a bigger stake in the new entity. The companies have already lined up buyers for assets they’d have to sell to get regulatory approval, with Ireland’s CRH Plc accounting for the biggest chunk at 6.5 billion euros ($6.9 billion).

Investors remain keen to see the merger go through, and there is pressure to reach an accord before investors of CRH meet on March 19 to approve the purchase of assets, people familiar with the matter have said.

New Proposal

Lafarge shares dropped as much as 5.5 percent in Paris trading today, while Holcim lost as much as 2.1 percent in Zurich and CRH declined as much as 4.4 percent in Dublin.

Under the original agreement, Holcim was planning a capital increase to create new shares and to give one of those to Lafarge in exchange for one share of the French company. Under the new proposal, Holcim would give 0.875 of a share in exchange for one Lafarge share, said the people, who asked not to be identified because negotiations are private.

Lafarge has signaled it will make a counter proposal that would trim its weighting to 0.93 to get the deal done, the people said.

Performance Gap

Holcim and Lafarge in December said they’ll each contribute five managers to the executive board of the new company. Lafarge CEO Lafont was picked to lead a board that includes Holcim finance chief Thomas Aebischer. Some Holcim investors are critical of Lafont because of the French company’s lagging performance, people familiar with the matter have said.

Holcim and Lafarge agreed to combine operations after the global recession eroded demand for building materials, and as increased competition from emerging-market rivals undermined profits. The companies expect the combination to generate synergies of more than 1.4 billion euros.

“My best case now is that we’ll get nearer the Lafarge discount with a change of management,” said Ian Osburn, an analyst at Cantor Fitzgerald Europe. “Effectively, Holcim will feel like they’re paying to change the management.”

New leadership at the combined company is needed to ensure those savings targets can be reached and the two companies can work successfully together, one of the people said.

Seeking a Compromise

While both Holcim and Lafarge have been experiencing declining revenue and cash flow, Holcim’s have had less of a slide since the deal was struck, on average. And Holcim’s Ebitda margin — or the earnings before interest, taxes, depreciation and amortization it reaped on sales — exceeded Lafarge’s in the period, on average.

“Lafarge’s board of directors remains committed to the project that it intends to see implemented,” the Paris-based company said. Holcim said that it’s willing to enter into negotiations in “good faith around the exchange ratio and governance issues.” Both companies declined to comment beyond today’s statements.

Representatives for the companies are scheduled to meet as early as today as they try to reach a compromise as early as this week, the people said. Talks are ongoing and the structure could still change, they said, adding that both sides could also fail to reach an agreement.

“The probability that the merger unravels is increasing,” says Martin Huesler, an analyst at Zuercher Kantonalbank, who has a market-perform rating on Holcim. “Holcim is in the better position, Lafarge needs to fight more for the deal but on both sides credibility would suffer in case the deal breaks.”

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Holcim Ltd. and Lafarge SA's plan to create the world's biggest cement company is at risk of unraveling as both sides disagree over the leadership and financial terms, placing the future of the $40 billion merger in jeopardy. Switzerland's Holcim said it won't pursue the...
holcim, lafarge, merger terms, deal
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Monday, 16 Mar 2015 08:32 AM
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