Lafarge manoeuvres may prove costly

Lafarge manoeuvres may prove costly
Published: 14 March 2006

Lafarge SA will have to pay at least US$85 per share if it is serious about acquiring the rest of its North American subsidiary Lafarge North America Inc. (LNA), say sources.  A week ago, LNA asked its parent for more time to consider the US$75-per-share squeeze-out offer, and Lafarge pushed the deadline back to April 3. 
 
In early February Lafarge SA announced it would launch a tender for the 46.8 per cent of US$6 billion market cap LNA it does not own. Shares of LNA jumped nearly 30 per cent to US$82.75 and have stayed at around that level. While most sources believe the two cement companies will reach a deal, the prevailing sentiment is that a transaction will take place at a price closer to US$90.
 
Using recent deals in the cement industry, Richard Stoneman, an analyst with Dundee Securities, pegs the per-share value of LNA at $89.40, or 8.6 times EBITDA, the median EBITDA multiple for major transactions in the cement industry since 1999. 
 
Stoneman said Lafarge SA is likely to increase its proposal because, judging by the company’s financials, an acquisition of LNA would be accretive to the company’s earnings up to $100 per share. That plus the positive outlook for North American cement prices virtually ensures Lafarge SA will have to pony up more money to acquire its American unit. "Something above US$75 might be appropriate," Stoneman quipped. 
 
However, an analyst based in London said he believed Lafarge SA would go to US$85 a share to acquire LNA, and he said that was a fair price. "We tend to believe this is a done deal," he said.  The analyst added that Lafarge SA was particularly likely to see the offer through to completion because it has a new chief executive officer, Bruno Lafont, who took over in January this year, who faces the natural "credibility issues" of his new office and may need to get the deal done to prove himself.
 
Arnaud Lehmann, an analyst with Credit Agricole Cheuvreux in Paris, also said a transaction price of US$85 is "fair for both parties" and that the US$75 offer was a bit low. The time is right for the deal, he said, because cement prices are expected to be strong for the next 18 months to two years, and 2006 is expected to be another strong year for the US construction market. 
 
However, one banker close to the situation said he did not think Lafarge SA would raise its price, because anything higher than US$75 would be unfair for the company’s shareholders. He said that positive prospects for the American construction market over the coming years, as well as continued pressure from analysts and shareholders have motivated Lafarge SA to do the deal now. He also thought the US$75 price was fair for LNA because "if Lafarge [SA] goes away now, the share price of LNA will not be US$75."
 
As one analyst pointed out, Lafarge SA’s offer came not long after the company announced negative projections for segments of the North American business. On Oct. 20, the company released a sales report, writing, "some North American markets (North East and the Great Lakes) have recently appeared softer."  This announcement was seen by many as puzzling, given that American cement consumption is expected to rise 2.5 per cent per year until 2009, according to the Portland Cement Association. LNA’s average selling price was also up 12 per cent in 2005, and a further US$3-to-US$5-per-ton price increase has been announced for July 2006.  
 
However as a result of the announcement, LNA’s stock immediately dropped nearly 10 per cent to US$57.30 from US$63.50, and did not fully recover the losses until mid-January, little more than two weeks before Lafarge SA announced it hired JPMorgan and BNP Paribas as advisors on the offer. Lehmann also said the weakness in the Northeast and Great Lakes in the third quarter, as reported by Lafarge SA in its October announcement, created an opportunity for the offer, (abstracted from a Mergers and Acquisition report)