Local impact of foreign merger:Edelweiss

Apr 14 2014, 11:54 IST
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SummaryThree possible scenarios arise here from merger of Lafarge and Holcim

The boards of global cement majors Holcim and Lafarge have unanimously agreed to merge their global operations (in 1:1 ratio) to create the world’s largest building materials entity, to be called LafargeHolcim. In India, Holcim is present through ACC and Ambuja Cement, while Lafarge is present through Lafarge India Pvt. Ltd (LIPL).

The gigantic merger will see three possible scenarios in India: (i) ACC, Ambuja, LIPL will continue to function as independent entities in India. Indirect consolidation will make it a positive for industry if the Competition Commission of India (CCI) approves; (ii) objection by CCI may result in cement assets’ sale to third parties, and hence neutral for industry; and (iii) LIPL is acquired by Ambuja or ACC (high probability for ACC as it has cash on its books) and CCI approves the same.

While this will be positive at industry level, the deal valuation will decide its attractiveness for the acquirer.

We await clarity from respective companies regarding execution of the merger in India. We maintain our cautious view on the sector due to continued low industry utilisations.

LafargeHolcim-the world’s largest building materials entity: Holcim will issue one share for every one share of Lafarge, valuing the latter at 10x TTM (trailing twelve months) EV/Ebitda (enterprise value/ earnings before interest, taxes, depreciation and amortisation). LafargeHolcim will have presence in 90 countries with a combined cement capacity of 427mtpa (Holcim 206mtpa and Lafarge 221mtpa). The merger, which is expected to be completed by H1 2015, is expected to generate EUR1.4bn synergies per annum after three years.

Three scenarios for India

*The three entities—ACC, Ambuja and LIPL—continue to function as independent entities in India.

Though Holcim oversees the daily affairs for both ACC and Ambuja in India, the two entities continue to function independently. Similarly, LIPL also may continue to function independently despite the three entities having a common parent– LafargeHolcim. If CCI does not object, the merger will see indirect consolidation in Indian market which will be a positive for industry, especially in the east where the combined entity will have major stake (38%) in the region’s capacity. This, in our view, is one of the possibilities as CCI recently approved acquisition of 4.8mtpa of JP Associates’ cement assets in Gujarat by UltraTech. Post-acquisition, the two entities jointly control 45% of Gujarat’s capacity.

* CCI objects to independent functioning of ACC, Ambuja and LIPL, forces asset sale.

If the CCI objects to independent functioning

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