Merger Plans Support Cement Industry Views
BMI View: The announcement that the world's two largest cement producers, Lafarge and Holcim, are in merger talks supports our view that global cement producers would continue to seek consolidation and strategic alignment, in order to tackle high levels of net debt and improve cost efficiencies. As the companies seek to circumvent substantial competition issues, we expect a glut of cement assets to hit the market. This is good news for the fast growing regional cement producers who are looking expand their footprint and compete with the majors.
The global cement industry has suffered over recent years, as a slump in demand following the financial crisis hit revenues and exacerbated high levels of net debt built up following acquisition sprees in the mid-2000s. Over recent years, the major cement producers have focused their attentions on reducing this debt burden, through a series of efficiency drives and asset sales. European cement producers have been especially hard hit, owing to the protracted recession in the region's construction sector, as well as the impact of currency drag on operating profits. Following the first nine month 2013 results of the major cement producers, we stated that the theme of strategic alignment, including improving efficiency and reducing debt, would continue over the coming 12 months (see, 'Cement Producers Face Uncertainty As Asian Woes Offset European Recovery', 14 November 2013).
We see the planned merger between Lafarge and Holcim as a continuation of this theme. The two companies were highlighted in our analysis as victims of domestic currency strength, especially compared to weakness in revenue generating markets (such as India and Indonesia). They have also struggled with high debt levels for a number of years and have been two of the most eager in pursuing a cost cutting and asset disposal strategy. The merger can therefore be seen as the ultimate step in achieving cost efficiencies, debt reduction and strategic alignment. Combined, the companies hope to generate EUR1.4bn in synergies and will seek asset sales equivalent to 10-15% of EBITDA, with the highest concentration expected to be in Europe, where both companies have a high level of market penetration.
|Merger Helps Recovery|
|Lafarge, EUR And Holcim CHF, Share Price|