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In the first week of April, Switzerland's Holcim announced an all-share deal to acquire France's Lafarge to create a cement leviathan, with combined sales of Euro 32 billion ($44 billion). The Holcim and Lafarge managements have acknowledged as weak demand for all construction materials persists, the coming together of two industry leaders will help them fight market blues. The overriding considerations for the merger are cutting costs, improving operational efficiencies by creating a common pool of best practices and increasing market share.
The merger, likely to materialise in the first half of this year, will have major implications for India, the world's second largest producer and consumer of cement. Holcim, through majority ownership of Ambuja Cements (production of 20.96 million tonnes, or mt, in 2013) and ACC (23.86 mt), and the unlisted Lafarge India (capacity of 11 mt) are present here. Expectedly, the 350-mt Indian cement sector is curious about how the merged entity at the global level will run the three units here.
Anil Singhvi, chairman of Ican Investment and former chief executive of Ambuja Cements, has said, "ACC will merge into Ambuja and Lafarge will also merge into Ambuja." Singhvi's argument is based on the premise that Ambuja is directly owned by Holcim. For long, his was the lone saying ACC and Ambuja had a number of areas of overlapping costs - from production to marketing and management - and, therefore, these would eventually merge. He refused to change tack even while Holcim denied merger possibilities due to a few seemingly irresolvable issues.
Singhvi stands vindicated, as Ambuja says the Holcim restructuring exercise here is to "simplify its investment structure as well as unlock synergies". Ambuja will stay at the centre stage of restructuring, as here, Holderind, a holding company of Holcim, is to have 61.39 per cent ownership. If what Singhvi foresees fructifies, the merged entity will come under scrutiny by the Competition Commission of India. Perhaps, Holcim and Lafarge will be required to shed some assets.
At the same time, as Holcim's acquisition of Lafarge being is unparalleled in scale in the sector, it has major implications for the markets in Europe, the US, Canada, Brazil and wherever else the two have significant presence. Therefore, the merger will perforce be subject to scrutiny by competition watchdogs in more than one country. In anticipation, the merging groups have decided to disengage themselves from some businesses worth 10-15 per cent of their combined global earnings before interest, tax, depreciation and amortisation (Ebitda). LafargeHolcim, the new group emerging from the merger, "will offer higher growth and low risk, thus creating more value", claims Lafarge chief executive. The union is to lead to annual savings of Euro 1.4 billion.
The global economic crisis resulting from the 2007-08 recession meant low demand and prices for the cement sector, as it had to contend with high energy bills, which accounted for at least 25 per cent of total production costs. In this crisis lay the trigger for the merger. In India, the fact that the three entities are merging will lead to big saving and improvement in operational efficiencies. Through the years, ACC, Ambuja and Lafarge have built considerable brand equity. All the three command price premia for their products. Officials are wondering whether under the new dispensation, LafargeHolcim will continue to sell cement under existing brands.
Ambuja says the "golden period" for the Indian cement sector lasted three years from 2008, when consumption grew at a compounded annual rate of eight per cent. Since then, annual growth in cement consumption use slid to four per cent, capping capacity utilisation at 73 per cent. For cement, the key demand segments are housing (67 per cent), infrastructure (13 per cent), commercial construction (11 per cent) and industrial construction (nine per cent). As the economy grew 4.9 per cent in 2013-14, against five per cent growth in the previous year, demand for cement from all important consumption points took a hit. Inevitably, competition in the marketplace grew and only those making it a point to invest in brand-building through the years fared well.
The slump in cement demand will be reversed if the new government succeeds in promoting growth and giving a decisive push to house building and infrastructure development. However, a challenge is emerging from the steel sector. SAIL Chairman Chandra Shekhar Verma is leading a campaign against the highly skewed application ratio of the two building materials. "In many economies, cement and steel are used in equal proportions in building construction. In our country, however, for every three units of cement, one unit of steel is used. This has to change," says Verma. Besides low demand growth, the cement sector has to contend with a steady fall in the supply of linkage coal which, 2002-03, has fallen from "75 per cent of total fuel consumption to 35 per cent".
CHANGING TIMES
* Holcim, through majority ownership of Ambuja Cements and ACC, and the unlisted Lafarge India are present in India
* Ambuja says the Holcim restructuring exercise here is to "simplify its investment structure as well as unlock synergies"
* Ambuja will be at the centre stage of the restructuring, as here, Holderind, a holding company of Holcim, is to have 61.39% ownership
* The slump in cement demand will be reversed if the new government gives a push to house building and infrastructure development
