Cement Event Update; Holcim & Lafarge to merge operations; Big will get bigger - Emkay

Holcim & Lafarge to merge operations, Big will get bigger

Lafarge and Holcim to merge creating a global cement giant

Global Cement giants Lafarge SA of France and Holcim of Switzerland have announced their intention of merging their global operations under one roof to be named as "LafargeHolcim" which together will control 427 mtpa of cement capacity globally with big focus on emerging markets contributing 60% of combined entities CY13 revenue of USD 43 bn. We believe the consolidation of operations of both companies under one entity will enable the companies to unlock significant synergies (worth EUR 1.4bn), enhance cash flow generation to de-leverage balance sheet and re balance their presence in emerging markets. However, this would require clearance from competition commissions in many countries, particularly given the fact that the combined entities would control some significantly large market shares. The deal is expected to be completed by H1CY15.

Impact on India Cement landscape - Consolidation levels ex south to improve substantially

The potential merger of the two global giants will slightly reshape the level of consolidation in India. If eventually Holcim and Lafarge do merge their operation in India as well, the top two groups (LafargeHolcim and Ultratech Cement) will control 35% of total India capacity. Ex south the two groups would have a sizeable 48% control of the total capacities (existing 40%) and ~ 60% of the capacity in Eastern and Western region. We believe that these two regions will continue to remain premium pricing markets. Apart from the above two regions, if we take the control of top 5 groups on capacity, we see that the control rises significantly in east to almost 85% and almost 70% in the northern belt. Hence we believe that, north, east & west would remain firm pricing power markets.

What's in it for Indian minority shareholders?

- A formidable investment option apart from UltraTech Cement: If the combined entity proposes to merge all India operations under one roof LafargeHolcim, it will have a massive 70 mtpa domestic capacity that would be higher than Ultratech Cement 57 mtpa capacity and a better regional distribution with only ~14% exposure to supply surplus southern Region vs 22% for UltraTech. However the visibility of consolidation under one roof remains low as Holcim has still not provided any clarity on merging operation for its current operation under ACC and Ambuja.

- But, no open offer for minority shareholder: Since the two entities are executing merger where in Holcim will be issuing shares to Lafarge shareholders, there would not be any change in management control for the Indian entities. And hence there is unlikely to be any open offer for shareholders of Ambuja Cement/ACC

- Lafarge India might remain the unlisted arm of the global entity: We believe that LafargeHolcim might not necessarily combine Lafarge's India operations of 10.5 mtpa with the existing Holcim entities under ACC and Ambuja Cement. In which case the structure would be detrimental to the minority shareholders of ACC and Ambuja Cement. However, we believe the structure could create hurdles for complete exploitation of synergy benefits for India operations as minority shareholder could question the structure and eventual beneficiary of the synergy benefits.

Acquisition premiums might not really improve

We believe that the event might not really improve/enhance acquisition premiums as the merger of the two entities will remove one potential buyer out of the market. We also believe that merger is unlikely to drive other MNCs present in India to rush for acquisition. While Heidelberg Cement has made its intent clear for taking their India capacity to 15 mtpa, we believe that the company is unlikely to hasten up its acquisition plans with the local arm having ample spare capacity to grow in near term. Further we believe that the other two groups i.e. Vicat & CRH who have their presence in India through JVs with south based companies would first look to consolidate their presence by increasing their stake in local JVs and then look to expand through acquisitions.

Big will get bigger; remain positive on UltraTech, ACC & Shree

We believe the global merge of the two cement giants under LafargeHolcim will reshape the level of consolidation in the India Cement landscape and as highlighted earlier the 3 regions i.e. East, West & North are likely to see firm pricing power. As the top 2 groups in India (LafargeHolcim+UltraTech) have a significant 70% of their volumes coming from these regions, we expect these big players to benefits from this firm pricing power in these regions. Further, as the merger of Holcim and Lafarge will remove one potential buyer out of the Indian cement M&A space, we believe that acquisition premiums will largely are unlikely to improve. We believe that this will create opportunities for companies like UltraTech and possibly LafargeHolcim to acquire cement assets at lower valuations. Hence we continue to remain positive on UltraTech and would choose ACC as a platform from the LafargeHolcim group to play this consolidation theme. Further as the increasing consolidation improves pricing power in Eastern, Western & Northern regions, we believe that low cost producer like Shree Cement, which will have significant presence in these highly consolidated markets are expected to emerge as winners and we continue to maintain our positive view on Shree as well.

Source : Equity Bulls

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