LH Merger: LatAm, Asia, Africa
The Lafarge Holcim merger is being viewed as a good geographical fit in emerging markets given Lafarge’s strong presence in the Middle East and Africa, and Holcim’s significant exposure to Latin America and the Asia-Pacific region. However, regional overlaps in certain key markets are likely lead to the expected disposal of assets.
Moves to address anti-trust concerns already appear to be underway with Lafarge last month confirming the sale of its cement operations in Ecuador – one of the countries where the Lafarge Holcim market concentration seemed an issue as the combined market share would have totalled just over 80 per cent. Given that Ecuador has positive prospects for cement operations, analysts at Morgan Stanley have noted that on a standalone basis, reinvesting in the country may have made more sense for Lafarge, but it states: “given deleveraging targets and the merger with Holcim announcement, the disposal seems to fit that deal.”?
In Brazil, Lafarge and Holcim would only have a combined market share of around 15 per cent, but there would be significant overlap in the southeast of the country. Both companies have a sizeable presence in 'The Golden Triangle’ area which consists of Brazil’s three largest cities of Belo Horizonte, Rio de Janeiro and Sao Paulo. Therefore the disposal of some assets in this core region is expected.?
In India, a combination of Lafarge and Holcim’s operations is likely to create a market leader. Holcim is present through its ACC and Ambuja Cements (the second- and third-largest domestic producers, respectively), while Lafarge operates through Lafarge India Pvt Ltd. Lafarge runs units in Chhattisgarh, Jharkhand, Rajasthan and West Bengal while ACC and Ambuja Cements own integrated plants in Rajasthan and Chhattisgarh, among other places.?
According to local press reports,the combined post-merger Lafarge Holcim entity plus current market leader UltraTech would represent 40 per cent of total domestic production capacity, which is likely to prompt scrutiny of the deal by the Competition Commission of India (CCI). Therefore, to clear competition hurdles, Holcim and Lafarge may sell some assets and are considering units in Rajasthan and Chhattisgarh where the two companies have a common presence. They are also reportedly mulling sales of some of ready-mix concrete units to meet CCI market norms.?
In southeast Asia, the LH deal is unlikely to be challenged in Indonesia (where Lafarge’s position is small and remote although Holcim owns considerable operations in Java), or Malaysia where Lafarge is market leader, but Holcim only operates one grinding unit. However, in the Philippines, Holcim and Lafarge are the first and second cement players, respectively, and would have a combined market share of 81 per cent with some overlap in the Manila and Davao regions. While there are no formal anti-trust authorities in the country, the groups may consider potential disposals, most likely the sale of some assets currently held by Lafarge. Semen Indonesia has been touted as a potential buyer of the Philippine assets given its current strategy to expand business in southeast Asia.?
In Africa and Middle East, Morocco is the only market where the merger would lead to a significant overlap as Lafarge and Holcim also occupy the first and second market positions. Both Lafarge and Holcim’s Moroccan subsidiaries are listed. Holcim owns 61 per cent of its Moroccan operations. Lafarge and the investment vehicle of the Moroccan royal family both own 50 per cent of a joint venture, which in turn controls the majority of Lafarge Maroc (a listed company). It has been suggested by some industry analysts that if necessary, Lafarge may seek the agreement of the royal family to sell its stake in this joint venture to another party.
The LH merger is certainly set to offer highly-attractive growth prospects for the groups across the high-growth markets of Latin America and Africa, and eliminate any weaknesses of individual company investments in these regions. The combined entity will also become a force to be reckoned with for the new breed of emerging cement giants that have made their mark since the 2008 downturn.
While the industry waits to hear which assets will be next on the block, a research note by CM-CIC Securities observes that while the three core shareholders of Lafarge and Holcim are in support of the merger, it is unlikely that they will be happy to be "mere spectators". The research house notes that "If GBL and Nassef Sawiris as well as Dr Schmidheiny want to regain a decent return on their investments and see their assets continue to hold up against new entrants, they have to play an active role in the change of strategy."
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