While the proposed Lafarge-Holcim (LH) merger is widely being regarded as a good fit for the two companies, satisfying competition authorities in a number of key markets where operations overlap is critical for the deal to proceed. In western Europe, the LH tie-up could accelerate the restructuring process already underway by the cement industry to improve regional businesses and any disposals required by the two groups are likely to be surmountable.
To satisfy regulatory requirements Lafarge and Holcim will have to make divestments equivalent to around 15 per cent of revenue (around EUR5bn) and 10-15 per cent of EBITDA. Competition concerns are expected to be raised in some 17 countries spread across western and eastern Europe as well as the emerging markets. The companies envisage two-thirds of the divestments (by revenue) to come from developed markets, most notably in Europe.
In western Europe, potential competition issues could arise in Lafarge's domestic market of France – a country where cement demand still remains weighted by low confidence and plummeting housing volumes, resulting in little potential for robust recovery. In the cement sector, Lafarge is market leader (35 per cent) and Holcim occupies the third spot (20 per cent), giving the combined LH entity a market share of 55 per cent.
However, a closer look at the geographical spread of operations suggests that there is little regional cross-over. Holcim has a strong presence in the northeast of France, while Lafarge is more active in the west and south of the country. There is some overlap in the north of France (Le Havre and Nord Pas de Calais) which could be addressed by selling two cement plants, according to analysts at Exane BNP Paribas. Therefore, some divestments are expected to be required but these are not unmanageable. Vicat (France) could have an interest in one of the French plants, provided local competition authorities do not demand the creation of a new entrant. There is more overlap in aggregates and concrete, however.
Germany
In Germany, where the construction market has now bounced back after many years of recession, the outlook is one of stability given the strong economy and sound prospects. As the situation currently stands, the combined LafargeHolcim entity would have a market share of 22 per cent, of which Holcim accounts for 12 per cent. As with France, on a regional basis, there is no significant overlap as Holcim operates in the north and southwest, while Lafarge’s plants are more widespread.
Holcim’s presence is, however, set to increase as it has received unconditional clearance by the European Commission for its proposed acquisition of Cemex West in Germany as part of a wider European deal between the two companies. The Germany acquisition includes one cement plant, two grinding stations (total cement capacity of 2.5Mta), one slag facility, 22 aggregates locations and 79 ready-mix concrete plants and would be combined with Holcim’s existing northern German operations. Holcim expects the acquisitions to optimise its footprint in the northwest of the country.
Spain
The ongoing downturn in the Spanish market, where demand is around 11Mt, has led to a number of producers streamlining their operations to scale back on overcapacity. Holcim is currently still waiting for the approval of a merger between its cement operations and those of Cemex. The Switzerland-based producer would be minority shareholder of the new company with 25 per cent. If the merger is approved the group could either sell Lafarge positions or its stake in the Holcim-Cemex company. If the Holcim-Cemex merger does not go ahead, the LH overlap is limited at around 20 per cent (ie, seven and 13 per cent for Holcim and Lafarge, respectively).
UK
In the UK, where Holcim does not have cement capacity, concerns are likely to be raised in terms of the aggregates, ready-mix and asphalt exposure by the two groups. Holcim's subsidiary Aggregates Industries and the Lafarge Tarmac joint venture would give the merged entity a 50 per cent market share, which is certain to be challenged by the UK Competition Commission (UKCC). The authorities recently ruled against the cement industry in the UK, ordering Lafarge to sell a second cement plant following its JV with Tarmac (Anglo American) and limiting the ability of the industry to disclose pricing data (the ruling is being appealed). Industry analysts believe Lafarge Tarmac's downstream operations (aggregates and concrete) could be sold and Anglo American is understood to be looking for an exit. Alternatively, the groups could divest part of Aggregates Industries, the UK company acquired by Holcim in 2005.