Monday 22 January 2018

Share watch: Big cement merger still searching for perfect mix

Today LafargeHolcim are still in the spotlight. Photo: AFP/Getty Images
Today LafargeHolcim are still in the spotlight. Photo: AFP/Getty Images

John Lynch

Only the foolish would refuse to take the major world building products multinationals very seriously. This is just as true in Ireland as anywhere else.

Since its creation in 1970, CRH has been the country's strongest worldwide brand. None other than Seán Lemass agreed to be its chairman in the early days of the company.

Power certainly tends to gravitate towards the cement giants, so perhaps for that very reason they've been saddled with more regulation than most.

They also become the principle focus of investigative reporters who consider their idiosyncrasies and little foibles 'great copy'.

Those of us who have been following the travails of the two-year-old French/Swiss cement merger between Lafarge and Holcim have scarcely had a dull week. It was a big deal with the creation of an enlarged group with operations in 80 countries, 90,000 employees and 2,300 operating sites.

From day one the deal attracted investor scepticism but also solid support from the families.

They reckoned on substantial savings in operations, purchasing and financial costs, and believed the heavy borrowings that funded previous expansion programmes would be repaid.

A bonus was that both companies complemented each other geographically; Lafarge being strong in Africa, Holcim in Latin America.

Alas the deal was dogged and almost derailed by management squabbles and culture clashes. Ironically something similar happened in the early days of CRH. The French/Swiss deal was also hit by a global glut of cement. Then just as things were settling down the group lost its chairman.

Today the group is still in the spotlight. The recent resignation of its CEO, Eric Olsen, an American and a Lafarge veteran, is another blow to the cement concern. Olsen's resignation was due to the growing controversy over the past activities of its Syrian operation. Human rights organisations accused the company of financing Isil and putting local staff in danger.

Paris prosecutors opened a preliminary enquiry. Under this pressure Olsen had to go.

Like most mergers the company has to streamline its operations and squeeze out significant costs. However, it would appear that some elements of the merger were not well prepared, particularly its commercial strategy.

The lack of leadership and the inability to work together meant that some hard choices were delayed or not taken.

In recent times the group has sold overlapping operations (CRH bought €6.5bn of its assets), reduced capacity by 70 million tons, and rebalanced its operations and cut costs.

Today the cement giant, which is quoted on the Zurich Stock Exchange, has a prominent position in Europe and solid operations in fast-growing countries like China and India.

It has more than half of its sales in the developing markets. It is the number one company in one third of its 80 markets and in the top three in the remainder.

The company's cement operations are its largest, having almost two thirds of group sales and 56,000 employees.

It sold 233 million tonnes worldwide, with the Asia/Pacific region accounting for almost 50pc, dwarfing both Europe and North America.

LafargeHolcim, with its global footprint, had sales of €24.8bn, down almost 2pc.

Operating profits were up one fifth to €4.8bn, the Middle East and Africa being the standout regions.

Today the share trades at €50.27, up from a yearly low of €35, with a market value of €31bn. The share is not worth a flutter at the moment as there is better value in the sector.

If investors thought all the bad news ended with Olsen's resignation, they are mistaken. A few months ago the French foreign minister criticised the group for bidding to build the Mexican wall as promised by US President Donald Trump. It appears cement and concrete companies have an unfortunate tendency to mix business and politics which doesn't always work as it should.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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