Date: July 2015 (3 posts)
The next deal

Hot on the heels of the completion of the Lafarge Holcim merger comes the news of another coming together of two giants of the cement industry - Heidelberg and Italcementi. At the outset, the former of these two deals was slated as a merger but as time told, the Holcim profitability resulted in it being more highly valued as well as allowing Holcim have their say over who was to lead the newly formed group. It will be interesting to see over the coming years where the power really lies within this newly formed group.

The Heidelberg Italcementi deal is somewhat different in a number of respects. Firstly, Heidelberg are buying a 45% stake of Italcementi with a view to purchasing the outstanding shares once this initial purchase has been completed. Therefore the deal is a buyout and not a merger. The share price that is being paid is €10.60 - a premium of 61% over the Italcementi closing price last night. Whilst this might seem excessive, it represents 7.9x EBITDA, which is not dissimilar to the price that CRH paid for the Lafarge Holcim assets at 8.6x EBITDA. However, Heidelberg Chief Executive Bernd Scheifele told analysts "The saying is there are no cheap assets in this industry. There are, and I think we have found some of them". Heidelberg clearly see this deal as a way to strengthen the position against Lafarge Holcim as well as unlocking some of the potential that exists in Italcementi, which like many cement producers has struggled with debt in recent years.

The deal should me much simpler than the Lafarge Holcim deal, with there being very little geographical overlap between the two companies with only two disposals in the USA and one in Belgium being expected. Therefore the assets disposal process that was required for the Lafarge Holcim deal will not be required in this case.

All of this does little for the EU position of creating more competition in the market - the Lafarge Holcim deal will do nothing to improve competition in Europe and now the consolidation of these two companies, which have a significant but limited overlapping presence, will lead to less price competition in this large market.

UPDATE: In out last blog, we discussed the Lafarge Holcim Synergies. Last week Lafarge Holcim announced a 100mCHf target for synergy savings by the end of the year as well as a reduction of 200mCHf in Capex over the 2015 business plan of the two companies. The former figure in not completely unexpected, with headcount reductions already announced in Switzerland and France, but the reduction is Capex is more interesting. Maintaining profitability and delivering results with reducing Capex (especially if the Capex is maintenance capex and not new project capex) do not normally go hand-in-hand.


The next round of "Synergies"

So the day has finally arrived when two become one - the merger of Holcim and Lafarge has finally been completed. Although bearing in mind the complexity of the deal, the assets that required disposal, the regulatory issues that had to be resolved and the last minute adjustments to value and board positions, what has been achieved in bringing the two companies together is incredible. So now the task of actually delivering some value from this deal - the task that the shareholders will be watching with very close interest - monitoring whether the so called synergies can be achieved.

Lafarge should be no strangers to this process, having first merged with Blue Circle Industries and then a number of years later with Orascom. So where do the synergies come from? Headcount reductions have already been announced covering Head Office functions and Technical Centres, although in the latter case the size of the headcount reduction is proportionally larger than the fraction of businesses that are being disposed of by the merged group. Whilst reducing headcount, it is essential that technical performance of the businesses is maintained or increased so that the underlying savings from the headcount reductions are not eroded.

Procurement savings often come high up the list of synergy savings but often simply lead to disputes between the plants and the procurement department. The old saying "you get what you pay for" still holds true and all to often what the procurement department delivers (in their quest to deliver their challenging targets) does not meet the plants requirements - be it fuels, raw materials or spare parts.

The claimed synergies can also be eroded by the simple fact of two companies merging with very different ways of working such as the use of ERP systems. The capital cost of standardising the systems will have been factored into the savings, but what will not have been factored in will be the decision making process, the clash of cultures where each side attempts  to maintain as many of their systems as possible, the delays in making a decision and the unexpected over-runs in any such IT project. 

The cultures of the two companies may well be the biggest obstacle to this deal really delivering but there is always a silver lining - whilst synergy targets are often quoted for a two to three year period post merger, they generally seem to be forgotten by investors - or at least the company isn't held to account for them - after the first 18 months. So as long as year one delivers well, everyone will be happy.......maybe!


By-pass minimisation

This weeks blog is a short discussion relating to the use of gas by-pass systems for the removal of volatile materials such as alkalis, sulphates and chlorides from the cement manufacturing process. The challenges that these systems present are discussed as well as some of the simple steps that can be taken to address these challenges.

As most "cementies" know, the principle of the by-pass system is to extract some of the gas from the kiln back-end/riser area of the preheater and precalciner system. The volatile materials are mostly in the gas phase at the temperature at which the gases are extracted and these gases are rapidly cooled by quench air, causing the volatiles to condense on the dust that is also extracted from the system with the gas. The amount of gas that is extracted should be sufficient to allow enough of the volatile materials to be extracted from the system so that the process can be operated without sulphate or chloride blockages in the lower stages of the pyro-processing system (or in the case of alkalis, sufficient alkalis to be removed to reach the desired final clinker quality).

The use of a by-pass system results in an elevated fuel consumption which is made up to the following four elements:

  1. The loss of the heat from the process of the hot gases from the kiln which could have been used in the preparation of the meal going to the kiln
  2. The heat which is carried out of the process in the dust that leaves with the bypass gas
  3. The energy that has been used to heat and partially decarbonate the dust that leaves the process
  4. The heat that is drained from the burning zone when the volatiles are evaporated, which is then released when the volatiles condense.

In addition to this, the use of a by-pass results in the challenge of disposing of the by-pass dust, which by its very nature is rich in volatiles. The high volatile dust is very fine and fluffy and is very easily lifted in the wind causing fugitive dust issues. The dust also contains metals which can be leached out of the dust and in many countries is a controlled substance. 

It is essential for the cement manufacturer to keep a close control over the by-pass usage to ensure that it is operating at the correct level and that it is not being over-used - resulting in significant waste of fuel, power and raw materials. A few simple checks that can be completed are listed below:

  1. Check the raw materials inputs to see if they are the same as when the plant was designed and establish why the by-pass was installed - was it for alkalis, sulphate or chloride? Have the raw materials changed since the plant was commissioned - allowing the by-pass level to be reduced? Check on the alkali sulphate molar ratio to see whether it is within an acceptable range where volatilisation shouldn't be an issue?
  2. Check whether the amount of by-pass losses are close to what they should be for the process - this is by a heat and mass balance of the process and adding up all of the elements of by-pass loss. The industry standard for a precalciner kiln is 2.5 kcal additional fuel consumption/percentage of by-pass used. This assessment can indicate whether excessive levels of dust are leaving the system with the by-pass gas.
  3. Check the burning conditions in the kiln to minimise volatilisation in the burning zone - is the burner pipe centrally positioned up the axis of the kiln, is the kiln back end oxygen analyser working correctly and is there sufficient oxygen in to avoid reducing conditions and is the raw meal residue at the correct level to avoid excessive combinability temperature?

These simple checks can have surprising results that can lead to an action plan to reduce the by-pass usage and therefore a reduction in fuel consumption, an increase in throughput and a reduction in the quantity of by-pass dust generated