Analysis: Holcim likely to buy next as sector consolidates

Analysis: Holcim likely to buy next as sector consolidates
Published: 15 January 2008

Holcim was conspicuously absent from a round of industry consolidation in 2007, but its big cash pile means it could acquire a rival in the coming months, according to analysis from Reuters.
 
Holcim, the world’s second-largest cement maker, is likely to focus on acquisitions rather than return cash to shareholders as it uses its strong balance sheet to bolster its position in emerging markets, without having to take on major amounts of debt in the process, analysts say.  
 
" Holcim has digested its previous acquisitions so a buy in the next few months is very likely," said Helvea analyst Patrick Appenzeller. "We would expect an acquisition in the emerging markets. A takeover in Africa or South Asia is a possibility."  
 
Cement companies are looking to boost their presence in emerging markets as the construction markets in North America and Europe slow and growth picks up in countries like India and China, thanks to soaring demand for housing and infrastructure.  
 
In December, larger French rival  Lafarge increased its exposure to the high-growth emerging markets with the acquisition of Egypt’s  Orascom Cement for 8.8 billion euros ($13.08 billion), lifting  Lafarge’s shares.  
 
"The planned acquisition of  Lafarge shows the huge consolidation potential in the cement industry. Globally, this sector is still highly fragmented," said Marc Haenni, Fund Manager of Vontobel Fund - Swiss Stars Equity. 
 
"For us it would not be a surprise if the next acquisition step came from Holcim," he said. 
 
Holcim is most likely to look for buys in Asia, Russia or the Middle East, where oil and gas revenues have fuelled a construction boom, analysts said.  
 
REASONABLE DEBT  
 
Holcim, which spent some SwFr2bn (US$1.83bn) on takeovers in 2006, did not make any large purchases in 2007 and analysts believe the group has the firepower to make a bigger buy and still keep its debt ratio at a reasonable level.  
 
"With Holcim’s financial capacity it could spend about 10 billion francs on an acquisition and would still get to a gearing of below 100 percent by the end of this year without a capital increase," said Helvea’s Appenzeller.  
 
Holcim’s gearing – net debt against total shareholders’ equity – was 66.7 per cent at the end of September and some expect it to be slightly above 60 percent by the end of 2007.  
 
The group, which has a market capitalisation of around $26bn, is likely to have cash of around 2.9 billion francs by the end of 2007, said Syz & Co analyst Jerome Schupp.  
 
"We expect net debt to be around 12.2 billion francs. At the same time,  Holcim should finish the year with around 19 billion francs of shareholder equity. This would mean that  Holcim’s gearing is pretty low," said Schupp.  
 
EMERGING MARKETS  
 
Holcim has said it is looking for bolt-on or large acquisitions in mature markets to boost its aggregates unit that handles the rock, gravel or sand used in construction.  
 
The group has also said that buys in its cement unit were a possibility in emerging markets, which already account for 75 percent of the firm’s cement capacity.  
 
"Potentially, we could see more consolidation in aggregates in the U.S., but the main focus for firms like  Holcim and  Lafarge is to build up their presence in cement in the emerging markets," said one analyst who asked not to be named.  
 
Holcim could target small-sized cement firms in Thailand, such as unlisted Jalaprathan Cement or Bualuang Cement.  
 
In Latin America, analysts said companies such as Mexican family-owned cement producer  Cementos Cruz Azul, top Brazilian cement maker  Votorantim Cimentos or Chile’s Cimentos Bio Bio could be of interest to  Holcim.
 
Zuercher Kantonalbank’s Huesler said Saudi Arabia, Iran and the United Arab Emirates could also be of interest to  Holcim. The group may buy a larger stake in a local cement producer in Russia if the opportunity arose, Huesler said.  
 
Last year, Holcim focused on building up its stakes in local companies in India and buying out minority stakeholders at Canada’s St Lawrence Cement Group, while its rivals went for bigger buys.  
 
Mexico’s Cemex spent $16 billion buying Australia’s Rinker and Germany’s  HeidelbergCement paid 8 billion pounds ($15.69 billion) for British group  Hanson plc.
 
Valuations within the building materials sector are relatively low, with  Holcim trading at 10.48 times expected 2008 earnings -- in line with  Lafarge, while  Cemex is trading at around 8.78 times, according to Reuters data.  
 
Source: Reuters