Holcim well placed to buy into construction downturn

Holcim well placed to buy into construction downturn
Published: 24 June 2009

Holcim, the world’s second-largest cement maker, is well equipped to exploit a global construction slump and snap up more cheap assets from rivals seeking to raise funds.

The Swiss group’s purchase of debt-laden Cemex’s Australian operations at a knock-down price last week highlighted its ability to snatch market share from stretched rivals forced to dispose of assets.

"It’s a bold move to go for a takeover of A$2.02bn in the biggest crisis since the 1930s. This shows that this company has firepower," said Vontobel analyst Patrick Laager.

Holcim, which is paying for its largest takeover since 2005 through a CHF2bn (US$1.84bn) rights issue, could go for another capital increase to raise more funds for a future deal, analysts said.

JP Morgan analyst Mike Betts said Holcim could spend as much as CHF3bn on a deal without having to go to the markets again while an analyst at a Zurich-based bank said the group could raise up to CHF2bn through another capital hike.

Holcim’s shares have outperformed the DJ STOXX European construction index since the Cemex Australia deal, which gives it access to the resilient Australian market, as investors shrugged off the 12 per cent rights dilution.

"Investors clearly want to give Holcim money and are convinced that this is a good investment. The multiples of the deal are good," said Helvea analyst Patrick Appenzeller.

The Swiss group also has a less demanding debt to equity ratio than its rivals. At the end of 2008, Holcim had a gearing of 83 percent compared to larger rival Lafarge’s 110 per cent and HeidelbergCement’s 141 per cent, according to Thomson Reuters data.

The price for the Cemex deal represents an expected 2009 earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of 6.6 times compared to the multiple of 11.6 Lafarge paid for Orascom in 2007.

It is also far below the 10.6 times trailing EBITDA Cemex originally paid for the Australia assets that it bought as part of Rinker in 2007.

"There is no way Holcim would have been able to get these assets at this price a few years ago. It would have had to pay at least 30 per cent more," said Betts.

"There are still forced sellers out there so it’s a good time for acquisitions," he said.

Other building materials companies, such as HeidelbergCement and Lafarge, are seeking to divest assets as a widespread construction downturn hits profits and puts a strain on financial costs linked to buys carried out in recent years.

Speculation has swirled that Holcim could go for HeidelbergCement’s Australian unit after Holcim raised its stake in Cement Australia to 75 percent, with the German group holding the remaining 25 per cent.

"It doesn’t make sense, for example, that Heidelberg only holds 25 per cent in Cement Australia. It is just a question of time until Holcim buys this business," said Vontobel’s Laager.

Holcim said last week it had not discussed this and it expects Heidelberg to keep its stake.

The Swiss group could look to shore up its position in the US aggregates market or go for buys that would boost its operations in Poland, such as cement plants, analysts said.

"Holcim will go for opportunistic buys here and there. More companies are likely to knock on Holcim’s door," said Vontobel’s Laager.

JP Morgan’s Betts said the integration of Cemex’s Australian operations should not require much work.
"It is a geographic bolt-on so that should not preclude any other deals," said Betts.

Holcim’s ability to clinch buys could allow it to close the gap with France’s Lafarge, said Helvea analyst Appenzeller.

"It is possible that Holcim even overtakes Lafarge in the next one to two years," he said, adding Lafarge now has 10 per cent more sales than Holcim compared to 20 per cent more before the Cemex Australia buy.

Vontobel’s Laager said Holcim’s position in markets like China and India could also give it the edge over Lafarge.

"India and China will be the most important markets in the next 20 years. Lafarge is far behind Holcim in India," he said, adding that the Indian cement market is growing nine per cent each year.

Holcim looks set to benefit from increasing investment in railways, shopping centres and airports in India, especially in Delhi, ahead of the 2010 Commonwealth Games, while government stimulus packages in China should also boost growth.