Swiss cement maker Holcim and French counterpart Lafarge look set to merge to create the industry’s biggest ever union.
In a statement, the company, to be named LafargeHolcim, said it would now embark on an asset sale in order to placate regulators.
The deal will forge an industry mega-giant as Holcim and Lafarge are already the biggest and second biggest cement manufacturers with operations in 90 countries.
Both companies are aware that such a dominant player in the market will attract a raft of regulatory obstacles in 15 jurisdictions.
The deal will help a combined company slash costs, trim debt and better cope with the soaring energy prices, tougher competition and weaker demand that have hurt the sector since the 2008 economic crisis.
The cement makers have given themselves a year to iron out any difficulties with the deal likely to close early next year.
LafargeHolcim said it would enter into discussions with the EU and others; confidant the new player will address all the competition issues raised by the regulators.
Analysts said it would bring together Holcim’s strength in marketing with Lafarge’s innovative edge and could generate substantial savings – provided that necessary asset sales, which may take several years, do not deplete that potential too much.
Muted opportunity for Cemex
The merger presents Mexican cement firm Cemex with a golden opportunity to snap up divested assets, but a heavy debt load means it is unlikely to make any big buys soon.
One of the world’s biggest cement companies, Cemex went on a massive, poorly timed shopping spree just before the last financial crisis. At that time it shelled out $16 billion to buy Australian peer Rinker, leaving it neck-deep in debt and poorly positioned when the US housing market collapsed.
Cemex came close to defaulting and its share price plunged before it went through painful refinancings that have put it back on its feet but capped its spending. That cap could now be a strait-jacket preventing Cemex from spending big as Holcim and Lafarge look to sell off five billion euros ($6.85 billion) in assets.
“We don’t see Cemex being able to buy something. Its level of leverage is something that blocks it,” said Fernando Bolanos, an analyst at Mexican brokerage Monex. “Nor do we see it as a buy-out target.”
Cemex had $16.3 billion (11.84 billion euros) in net debt at the end of 2013 and a ratio of net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of 6.2, well above the industry average, as well as limited cash flow.
Under a 2012 debt refinancing covenant, Cemex must use cash flow to pay down debt, restricting what it can buy. High debt leverage means Cemex’s credit ratings lie four levels below investment grade, which it hopes to regain in 2016.
Holcim and Cemex announced plans in August to exchange some assets and combine others in Europe, seeking cost savings in response to tough conditions in the construction sector. The deal has already come under regulator scrutiny and its fate is unclear.