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Aggregate demand

7 April 2014 By Quentin Webb, Chris Hughes

Lafarge and Holcim’s share rally has gone far enough. The Franco-Swiss duo’s planned 37 billion euro ($50 billion) mega-merger, which would create the world’s biggest cement maker, has already added 3.3 billion euros in combined market capitalisation since the deal leaked on Friday. Cost savings and revenue boosts could in time be worth a lot more. But the market’s caution is justifiable.

The companies reckon a combination will require 1 billion euros in implementation costs and create 1.4 billion euros of annual pretax synergies by 2017. Of these, about 800 million euros are cost savings in areas such as logistics, procurement and administration. Another 400 million euros come from cheaper borrowing costs and leaner capital expenditure. The final 200 million euros are “cross-fertilisation of value-added product portfolios,” a fancy phrase for more doubtful revenue synergies.

If everything comes through, the gains will amount to 4.4 percent of combined sales – an ambitious target for the building materials sector. Taxed, capitalised, and discounted back to the present day, the cost and financing synergies have a rough net present value of about 7.1 billion euros – double the initial stock market gain.

Are investors too sceptical? Well, even if everything goes to plan, the 90-country merger won’t close for more than a year. The uncertainty deserves a discount.

Then there is regulatory risk. Brussels has been probing anticompetitive behaviour in the cement industry since 2008 and the companies have big overlaps in France, Canada and elsewhere. Antitrust authorities could demand tougher-than-expected concessions, perhaps even effectively vetoing the union.

Lafarge and Holcim are trying to get ahead of the regulators with a pre-emptive offer to sell assets with 800 million euros of EBITDA. Recent sector deals suggest a fair value of around 6.5 billion euros, or a little less than a fifth of the pre-disposal combination. Even with the deals market picking up, there’s a risk that the proceeds will prove disappointing.

There is upside. If the deal happens and management delivers, a re-rating of the more profitable company could follow. But for now, investors are right to reserve judgment.


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