Credit Suisse cements Lafarge Holcim merger

It was claimed that a merger between cement giants Holcim and Lafarge could not be done. However, a complex sale of assets by both parties in order to satisfy the many regulators involved disproved these claims. And Credit Suisse was one of two banks advising Switzerland's Holcim on the €6.5bn disposal.

The story began with the April 2014 announcement, to general surprise, that Holcim and France's Lafarge had agreed to combine forces. Since these were the two biggest beasts in the global building materials jungle, the common wisdom had been that a marriage was out of the question. Their combined market share in countries around the world would have had regulators everywhere reaching for their Tasers.

But the two cement giants were ready for the regulators, saying – even as they announced the deal – that they would sell assets with €5bn in revenues to win regulatory approval. Two-thirds of them, they anticipated, would be in Europe.

The merged entity will still be an uber-giant, under the new name of Lafarge Holcim. More often than not, big mergers destroy shareholder value rather than creating it. But observers think this is a 'good' merger, with real synergies, as well as complementary products and geographies. 

Right time, right places

"Cement is a relatively mature industry, and a key issue for the big players is how to grow their businesses," says Mark Echlin, Credit Suisse's co-head of Europe, the Middle East and Africa (EMEA) investment banking and head of its global industrials group. "The emerging markets have been a spectacular growth engine over the past decade or so but recently that growth has been wavering, so it makes sense to put these two big companies together. They can cut costs and rationalise while optimising exposure to growth opportunities around the world." Having a huge new kid on the block has suddenly changed the structure of the industry, he adds.

The timing of the merger was pertinent, and important for the disposals. "This transaction couldn't have happened in the financial crisis," says Vikas Seth, Credit Suisse's head of EMEA and global emerging markets mergers and acquisitions (M&A). "It could only take place when the view was that the bottom had been hit, and there were green shoots in evidence. So the timing was very opportune and allowed the follow-on transactions to occur."

The announcement of the merger was a statement of intent, and the key to it was to solve the anti-trust challenge with a very sizeable disposal. "But the disposals are also key to the value creation of the merger," says Jens Haas, Credit Suisse head of investment banking coverage in Switzerland. "This is a share-for-share deal, whose expected synergies create significant upside. But any disposals below the [seller's] trading multiple would detract from that." The sales had to create value for the vendors while maintaining the overall integrity and valuation of the merger.

Regulatory scouting

Cement is a bulky, low-value commodity which has always attracted competition and, as such, has been the focus of intense interest from regulators. "This was a very global transaction involving the two industry leaders, so there was going to be input from regulators in all key jurisdictions," says Marco Superina, head of Credit Suisse's M&A for northern Europe. 

More than 20 regulators were involved in the sale process, at least half of whom could influence the outcome in a material way. But they were not only concerned with physical market share issues. The European Commission (EC), for example, wanted assurances that any buyers would not represent the interests of important existing shareholders. In Holcim's case, that meant Thomas Schmidheiny, the son of the group's founder and wielder of the family's 20% stake. At Lafarge the key shareholders were Egyptian businessman Nassef Sawiris and Groupe Bruxelles Lambert.

With Credit Suisse and HSBC advising Holcim on the disposals, and BNP Paribas and Morgan Stanley advising Lafarge, the pieces of a complex jigsaw puzzle began to be put together. First, the candidates for disposal had to be selected – no easy process. This was like a marriage between two mature adults, each with a full range of household gadgets. There are two toasters, two washing machines, two of everything, and one of each has to go. Except that each of the betrothed is rather attached to his or her toaster. And when, after some soul-searching, one toaster is finally agreed on, the regulator may say no, you must sell the other one.

In France, unsurprisingly, it was mainly Holcim's assets that went into the auction, with a couple of exceptions. Holcim also waved goodbye to interests in Hungary, Serbia, Slovakia, Canada and Mauritius. Lafarge surrendered most of the UK, all of Germany, Romania, India and much of the Philippines. Both shared the pain in Brazil and the US.

After the selection had been made, a dual, or perhaps triple, track sale process was followed. Plans were made for a flotation, while simultaneously pursuing a trade sale. The trade sale had its own dual track – sale to one big buyer, or a number of individual deals with different buyers. There was one big buyer very much in the frame, Irish building materials group CRH, which was clearly very interested indeed. But a piecemeal sale process was needed to keep CRH's feet to the fire and introduce competitive tension to the auction.

"We put together one global package and five regional ones," says Brice Bolinger, Credit Suisse director, M&A, Switzerland. "The regional packages covered Europe, the Philippines, Canada, Brazil and the Indian Ocean (Mauritius and La Réunion). Within the European package, the UK was the largest business, and attracted separate interest."

Certainty, value and speed

Holcim and Lafarge had three prime objectives for the disposals – certainty, value and speed. Each option offered some but not all of those. The package solution was likely to realise the best value. "But the package route was uncertain," says Davide Sala, a Credit Suisse investment banking managing director who covers EMEA corporate clients in the building materials sector, among others. "What if we got five great deals and the sixth didn't work out?"

The capital markets route offered certainty but was unlikely to yield the highest price. Selling the whole to a single buyer would be the cleanest solution, but the value would be uncertain until relatively late in the day.

Another challenge was that the businesses being divested needed a management team. A strategic buyer would have its own management, but an initial public offering would need a separate team already in place.

In August 2014, a teaser went out to potential buyers, eliciting hundreds of responses. "We got a lot of requests for one or two quarries," recalls Mr Haas. 

Bids from financial sponsors were welcomed and staple financing packages were made available. "The offer of acquisition finance provided a floor valuation to the business, and signalled to sponsors that we were taking them seriously," says Mr Seth. He adds that one critical judgement was to continue to focus on the package sales until the end of the process. "That drove price competition for the whole business sale," he says.

One private equity consortium, made up of Blackstone, Cinven and the Canadian Pension Plan Investment Board, was in the bidding until the last moment. Competitive tension worked its magic, and the price was reported to have risen by $500m in the final week. But ultimately CRH won the bidding, offering an enterprise value of $6.5bn. This will make it the world's number three in building materials, though it did not take every single business on offer. Some are still being sold independently, notably in the US and India.

Seeking approval

There were other hurdles. CRH shareholders had to approve. The capital markets solution, approved by the EC, was kept alive in case shareholders rejected the purchase. But they loved it, and as CRH placed 10% of its market cap in new shares, its share price actually rose.

Most importantly, the Holcim-Lafarge deal had to be approved by shareholders, which proved awkward. After Lafarge shares underperformed, the one-for-one share exchange was renegotiated to nine-for-10 in Holcim's favour. Shareholder approvals for the €41bn deal were finally forthcoming. The merger should close in July.

This was one of the most complex exercises of its kind, and its successful conclusion will no doubt attract imitators. "It was a transforming transaction in the sector and will have a cascading effect on other players," says Mr Seth.