Just a week after closing the US$1.75bn divestment of Holcim Indonesia, LafargeHolcim is understood to be contemplating the sale of its Middle East-Africa business unit, according to Bloomberg. The sale of the group's Middle East-Africa unit would take divestments well beyond the group's announced target of CHF2bn (US$2bn).
In 2018 LafargeHolcim's Middle East-Africa operations are forecast to contribute 13.5 per cent (CHF816m) of group EBITDA and 11.2 per cent (CHF3090m) of group revenue in FY18, says Bloomberg.
LafargeHolcim operates 44 cement and grinding plants in the Middle East-Africa region and a cement capacity of 55.3Mta, according to its 2017 annual report. The company's biggest markets in terms of grinding capacity in the region are Algeria (12.6Mta), Nigeria (10.5Mta), Egypt (8.9Mta) and Iraq (5.7Mta).
However, the region has been troubled by intensified competition in Egypt, mainly due to the new 12.5Mta government-owned El Arish plant in Beni Suef. Falling demand is also apparent in Algeria, along with increased competition and price erosion. Meanwhile, the group's volume growth has been impacted by new supply in Nigeria.
In addition, the Moroccan cement market also saw demand fall by four per cent in 2018, and while reports have been circulating about LafargeHolcim perhaps looking to increase its shareholding in Kenya's East African Portland Cement, we could now see a sale of the group's shares in this company and also Bamburi Cement, which has seen profits drop in 2018.
The reported valuation for the Middle East-Africa unit of US$8bn implies multiples of approximately 10x 'trough' EBITDA or about 7x 'normalised' EBITDA, says Bloomberg. The analyst news service sees this as a good price for a business operating in currently challenging markets – similar to what was achieved with the LafargeHolcim Indonesian divestment.
How would a sale work?
"A sale of the whole unit would be large and unwieldy," the news service adds. Finding an industry buyer for the total divestment would be difficult, although a private equity buyer could be interested. An IPO is also possible, although it would be complicated by the presence of several listed subsidiaries and minority partners. It might be easier (and LafargeHolcim might achieve a higher price) if the unit were sold in parts or in blocks. Interested buyers might include the Chinese, Dangote Cement (Nigeria), Raysut Cement (Oman), CIMAF (Morocco) or PPC (South Africa), but they may only be interested in one or two strategically-located plants.
Portfolio balance
LafargeHolcim's exposure to developed markets would increase with such a large divestment. If LafargeHolcim were to exit Indonesia, Philippines and all of Middle East-Africa, it could shift developed market exposure from 38 to 50 per cent, says Bloomberg. This is potentially at odds with its positioning as a growth company, at least in cement, given emerging markets have fundamentally higher growth.
LafargeHolcim shifts focus to aggregates and ready-mix
As a multi-sector company, LafargeHolcim is not just trying to turn its cement business into a more efficient operation. It also has a desire to find higher returns from its investments in aggregates, asphalt, gypsum concrete products and the ready-mix sectors. This week the company announced two further bolt-on ready-mix acquisitions in Colorado, USA, and a premix concrete company in Germany.
Cemtech Middle East and Africa
To find out more about develpments in the Middle East and Africa region, join leading industry experts who will be attending the forthcoming Cemtech Middle East & Africa, 17-20 February 2019, in Dubai, UAE.