Cement mixing

Cement mega deal heralds industrial merger comeback

The big industrial deal is back. Holcim of Switzerland and Paris-based Lafarge are on the verge of announcing a merger to create a cement business worth $55 billion, based on their latest market values. The proposed deal is ambitious given that the combination of Europe's No. 1 and No. 2 players will require significant antitrust remedies. It shows that chief executives would rather strive for the transaction that creates most value than settle for anything less.

The pair has opted for a merger of equals, a structure often frowned upon - one side is deprived of a takeover premium and the governance gets fudged. In this case, the likely division of spoils looks designed to appease possible French political concerns. Holcim will ostensibly be the acquirer, issuing shares to Lafarge investors while providing the chairman and chief financial officer of the new group. The enlarged company is to be domiciled in Switzerland, too.

Holcim has the slightly larger market capitalisation - $29.5 billion versus Lafarge's $25.2 billion, based on their April 4 closing share prices. But it also has a slightly higher share-count. So, if Lafarge shareholders receive one share in the new company for every one they currently own, they will receive 47 per cent of the new company, worth a modest $300 million more than the value of their contribution.

Lafarge will, however, probably be in the operational driving seat. As the final agreement neared conclusion on April 6, Lafarge Chairman and Chief Executive Bruno Lafont was set to remain as CEO of the combined company, according to a person familiar with the situation. The French group also gets precedence in the new name - Lafarge-Holcim, not the alphabetically respectful Holcim-Lafarge. If this mix of duties is confirmed, it should provide some comfort to the French political establishment that the axe will not fall unfairly or disproportionately on domestic jobs. That won't be enough though. There should also be special assurances that switching to a Swiss domicile will not diminish the corporate tax contribution to the French exchequer.

Almost any deal involving these companies will require disposals to satisfy antitrust concerns. These could amount to 10 to 15 per cent of combined sales, according to a person with knowledge of the merger talks. Alternative transactions would face fewer obstacles, but they would have to be structured as takeovers not mergers. That would mean paying a premium for less synergy potential. The regulatory hurdles will take some time to overcome. But the proposed deal will have an immediate signalling effect for chief executives struggling for revenue growth. It shows that some business leaders feel sufficiently relaxed about regulatory, political and shareholder opposition to contemplate the biggest combination conceivable. Before Lafarge-Holcim is done, there could be other engagements.