Holcim Ltd. (HOLN) and Lafarge SA (LG) may face prolonged antitrust investigations and asset sales around the globe to win approval for a merger that would create the world’s biggest cement maker.
Holcim and Lafarge, in talks to create a company with sales of more than $40 billion, will probably have to sell units with overlapping operations to win regulatory clearance in the European Union, U.S., Russia and China for the deal, analysts and lawyers said.
“Competition authorities will analyze the deal in depth,” Assimakis Komninos, a lawyer at White & Case LLP in Brussels, said in an interview. “The companies will need to start already thinking about concessions.”
The deal would allow the cement producers to cut costs by combining their production operations to offset declining demand for building materials after the recession. Combining Holcim of Switzerland and Lafarge of France would also see them dominate global markets for cement, aggregates and ready-mixed concrete, according to 2012 sales volumes in a presentation published by German competitor HeidelbergCement AG in September.
The merged company would overtake HeidelbergCement in aggregates sales and Cemex SAB (CX:US) for ready-mixed concrete. Holcim’s bid for Cemex’s western German plants is already being probed by the EU over concerns the deal may substantially reduce competition.
“Significant asset sales” are most likely in Europe, particularly France, said Ian Osburn, an analyst at Cantor Fitzgerald Europe. The companies also have overlapping operations in Spain, Germany, “potentially” Russia, Hungary and the Czech Republic, he said.
Robert Muir, a construction analyst at Berenberg in London, said there’s also overlap in the U.S., Brazil, Philippines, Malaysia, Morocco and Canada.
Antitrust issues over cement capacity share may be “a significant barrier to any deal,” Muir said. “There is no chance of a merger without significant asset divestment and a deal that could take a very long time to complete.”
The antitrust implications of the merger in the U.S. would be reviewed by the Federal Trade Commission, which cleared the merger of Lafarge and Blue Circle Industries in 2001 after ordering the companies to divest cement businesses in three regions. The FTC worked with the Canadian Competition Bureau to determine the divestitures, the agency said at the time.
Lafarge North America is the largest diversified supplier of construction materials in the U.S. and Canada, according to the company’s website. Holcim and Lafarge are second and sixth in market share for cement capacity in the U.S., according to Jim Barrett, a New York-based analyst and director of research at CL King.
“For a deal of this size, you would expect to need clearance in a number of jurisdictions, including the U.S., EU, Russia and China,” said Timothy McIver, a competition lawyer at Debevoise & Plimpton LLP in London.
“The likelihood is you should expect a second-stage review in the EU to get this through, as well as possibly in a number of other countries,” he said, referring to an in-depth examination that can last as long as four months. Regulators in Brussels can block a deal or seek concessions, including divestments, before approving it.
While selling assets to appease regulators could trigger “a feeding frenzy” that would destroy a lot of value for the two companies, it might also allow them cut costs, Cantor Fitzgerald’s Osburn said. Vulcan Materials Co., Mexican and South American companies, or private-equity funds may be potential buyers of U.S. assets, he said.
Cement markets “tend to be quite local” due to the cost of transporting the product and “if they have a complementary geographic spread of cement products, there should not be insurmountable hurdles,” said Marc Israel, an antitrust lawyer at Macfarlanes LLP in London.
Even if the companies have a large market share in the same country, it may still mean they have plants in different areas, Israel said. Where there is overlap, asset sales are likely, he said.
Lafarge estimates in its annual report that it has a cement market share of 34 percent in France, 40 percent in the U.K. and 10 percent in Germany and Spain. It had a market share of 12 percent in the U.S., 33 percent in Canada and 7 percent in Russia.
The EU is already concerned about Holcim’s market power in its review of the company’s purchase of Cemex’s plants. Removing Cemex as a competitor could allow Holcim to coordinate with other companies and deter emerging rivals, the EU has said. The deal is part of an asset swap that sees Cemex buying Holcim’s operations in Spain and the Czech Republic.
European Union antitrust regulators have been separately investigating Holcim and Lafarge and their competitors since 2010 as part of a wide probe into possible collusion to fix prices and limit imports across Europe.
Antoine Colombani, a spokesman for the European Commission, declined to comment on whether the companies had already discussed the deal with EU regulators.
“You’d expect them to be engaging with the authorities ahead of time to see where possible issues could arise,” Israel said.
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