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.



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