LH Merger nears completion

As Holcim’s shareholders prepare to meet next Friday to vote on the planned merger with Lafarge, will the confirmed support of Eurocement and a better than expected 1Q15 performance by Lafarge be enough to seal the deal?

The planned EUR41bn tie-up between the world's two leading cement majors – billed as a “merger of equals” – was thrown into doubt in March as Holcim demanded new terms, stating that the deal “could no longer be pursued in its present form.” Holcim investors had watched the relative performance of the two companies diverge since the merger was unveiled in April last year. The rise in the Swiss franc against the euro and worries about the proposed management structure were other factors prompting its shareholders to push for a better deal. The deal is now back on track following revised terms in Holcim’s favour and the appointment of Lafarge’s Eric Olsen as CEO of the combined company instead of Bruno Lafont who is now to become co-chairman.

Eurocement endorsement
Holcim now needs the backing of two-thirds of its shareholders at the meeting on 8 May 2015 to approve a capital increase to fund the proposed deal. One major obstacle anticipated ahead of Friday's meeting has now been overcome, which will come as a relief to the two companies. After months of speculation and uncertainty, Holcim's second-largest shareholder Eurocement (with a 10.8 per cent share), on Wednesday publically confirmed its support of the merger. The company, owned by Russian Filaret Galchev, said in a statement: “Having analysed all advantages and disadvantages of a possible creation of the biggest global construction materials player we think that the prospective of the development of the combined company is very positive, so we will support the merger.” Speaking during a 1Q15 conference call yesterday, Holcim’s CFO, Thomas Aebischer, welcomed the endorsement, stating that Eurocement's announcement is one “which we obviously very much appreciate.”

Holcim recently risked alienating Galchev, who on 15 April 2015 said he would offer his support in return for a seat on the board of the combined company. Holcim responded by saying that the proposal had been received too late to be included in the agenda for next week’s shareholders meeting.

The nominated candidates for the future Board of Directors, which consists of seven members from Lafarge and Holcim, will be elected at next week’s EGM. Eurocement can still put Galchev's candidacy to the company's shareholders on the day of the meeting, provided the proposal meets form and content requirements, according to a Swiss securities lawyer quoted by Reuters. Meanwhile, Nassef Sawiris, Lafarge's second-biggest shareholder believes "it’s just a matter of time," for Galchev to join the board after the deal closes. “His knowledge of the industry, coupled with his sizeable investment in the new group, ensures he would add a lot of value to the company,” Sawiris told Bloomberg last week.

Results boost
First-quarter results published yesterday also bode well for the merger. Yesterday Holcim reported a jump in net profit helped by asset sales. Operating profit, adjusted operating profit and margins also increased despite lower volumes. Meanwhile, its French merger partner, Lafarge, posted a better-than-expected rise in operating profit of 17 per cent, with a 14 per cent like-for-like increase, supported by cost reductions and self-help measures. "Overall, a better than expected performance from Lafarge," Bernstein analysts said in a note. "This slight reversal of fortunes compared to Holcim ... should be good for the balance of the shareholder vote."

Bridging the cultural gap
US shareholder advisor ISS has also recommended that Holcim investors back the merger. ISS said in a report to investors that the deal warranted investors’ support as it had a clear strategic rationale and offered upside to Holcim investors through synergies. However, the shareholder advisor stressed that a successful integration of the two companies with Olsen at the helm is key.

 “The companies are betting that American Eric Olsen will bridge the cultural gap,” said the ISS report, dated 20 April. “But Olsen is untested in the role at either of these firms, let alone at the task of integrating them into the world’s largest cement company. It may well be that execution on the operational and strategic fronts is slowed until the cultural issues are resolved.”

Divestment update
News on the asset disposal front has also gathered pace. Last Friday the European Commission (EC) approved CRH as a suitable purchaser of the assets to be divested by Lafarge and Holcim in the EU. Additionally, the Irish building materials major has also received clearance for the acquisition of these assets.

Elsewhere, the final US asset disposals have been announced with Italcementi (Italy) and Summit Materials (USA) named as buyers for certain facilities. The groups have also received clearance from the Competition Commission of India with a package of divestments been agreed involving the sale of two Lafarge plants in the eastern part of the country. The combined group will have a cement capacity in India of around 68Mta.

With important milestones having being reached, both companies have said they are continuing to work intensively on preparing the closing of the transaction and a successful post-merger integration.

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