Reinforcement needed

Holcim can push for more in Lafarge tie-up

Holcim can secure a better deal from Lafarge. The Swiss cement group is outrunning its French rival, creating cracks in their $44-billion tie-up. Deal failure would hurt both groups. So concessions are more likely than the premature end of this "merger of equals," as happened with advertising powerhouses Publicis and Omnicom last year.

Structural weaknesses were built in the merger from the start. An MoE can spur distrust among both staff and investors. Epic scale also brings competition hurdles and delays to match.

Annual results recently underscored Lafarge's exposure to troublesome markets and financial weakness. Next to the Swiss, it looks debt-laden and under-invested. And outlooks for future measures like Ebitda and free cashflow have diverged markedly since everyone shook hands almost a year ago. This is awkward for Lafarge boss Bruno Lafont, the CEO-designate of the merged group.

Hence a gulf has appeared between Lafarge and Holcim shares. They were initially to be exchanged one-for-one. As of March 12, the French stock was 8 per cent cheaper.

What next? The duo are talking about a rejig, two people familiar with the matter say. Switching to a takeover is implausible. Holding steady is risky. So analysts moot a pre-deal special dividend to Holcim shareholders, which might total roughly $3 billion, or a higher share-exchange ratio in their favour.

The former is simpler and friendlier. But it reduces a key deal benefit: welding Lafarge's creaky balance sheet to Holcim's sturdier capital structure.

The latter - a different exchange ratio - tackles a big problem: the fact that Lafarge shareholders get jam today, while the Holcim camp must wait years for earnings-per-share benefits. But the bigger Holcim's stake, the less it will be possible to present the deal as a France-friendly merger. Querying Lafont's role and other appointments would worsen matters.

For all that, forgoing synergies that the two sides say will total euro 1.4 billion a year would be bad all round. Anchor shareholders in both camps do want a deal. Bernstein's analysts say giving Holcim 10 to 15 per cent more should do it. This superstructure can be fixed.