Moody's has put Lafarge's Ba1 rating on review for a possible upgrade following the announced merger proposal with Swiss peer Holcim. At the same time, the credit rating's agency has changed its view on Holcim's Baa2 rating to negative from stable.
The ratings actions reflect the fact that Holcim has a stronger balance sheet and credit rating than Lafarge. "The merger of Holcim and Lafarge will create the largest and geographically most diversified cement producer worldwide," said Moody's senior vice president and lead analyst at Moody's for Lafarge, Falk Frey said. "However, the weaker capital structure of Lafarge and the execution risks resulting from the complexity of the merger weigh negatively on the Baa2 ratings of Holcim and consequently triggered the outlook change to negative," Falk added.
"In our view the plan, if executed successfully, is credit positive for Lafarge. Whereas we estimate Lafarge's leverage calculated as debt/EBITDA to be at 5.4x in 2013, Holcim's adjusted debt/EBITDA was 3.1x in 2013," Falk said.
The review will mainly but not exclusively focus on the timely and successful execution of the merger especially with regards to the asset disposals planned and the valuation achieved as well as the realisation and timeline of the cost synergies targeted.
Moody's expects to close the review shortly after the closure of the merger, which is expected for 1Q15. If the transaction is successful, which Moody's does not expect to happen before 1Q15, the review could lead to an upgrade of Lafarge's long-term ratings to the same level as that of Holcim.
Moody's generally views the strategic rationale of the planned merger as positive as the combined group will have an even more geographically balanced presence than Holcim and Lafarge on a stand-alone basis. “This business profile should provide a better resilience to cyclical swings in demand for cement, aggregates and ready-mix concrete in individual countries. Nonetheless, the merged company will remain exposed to the cyclicality of the cement and aggregates industry,” the rating’s agency says.
