Construction Coupling Cementing the Deal

The merger of Lafarge and Holcim will create the world's biggest cement producer but the two companies may not mix as well as their product.
So where does the merger leave me?

Two sturdily built men wearing white overalls and safety goggles stand in front of a cement mixer. One of them empties the contents of a bag of cement into the mixer, and then throws the bag in afterwards. The other starts up the mixer. After a couple of minutes, the sack disintegrates and mixes with the gray mass of building material. This entire manouvre is full of technical innovation.

Water-soluble cement bags are just one example of how the Paris-based building materials giant Lafarge plans to rise above the competition. The company runs runs its own research center near Lyons, France, developing the construction material solutions of tomorrow.

“Each year we spend €120 million ($187.3 million) on research and development,” Lafarge’s Chairman and Chief Executive Officer Bruno Lafont says.

But Mr. Lafont has more than innovation on his mind. For weeks he has been traveling from country to country to convince market analysts and journalists that the merger of Lafarge with Swiss rival Holcim makes good business sense.

The corporate marriage cleared a major regulatory hurdle this week when the European Commission gave its approval. But complete integration remains a long way off as important details of the merger remain unclear. In fact, the president of the new company, Wolfgang Reitzle, the former head of the German gas and engineering company Linde Group, faces an array of challenges.

Complete integration remains a long way off as important details of the merger remain unclear.

The two companies announced in April that the proposed deal would be a “merger of equals.” With combined sales of €32 billion, the new company would become by far the largest cement producer in the world. But to gain approval from the almost 20 antitrust authorities involved, parts of the companies - with sales totalling €3.5 billion - must be sold.

The structure of the Holcim-Lafarge has also not yet been finalized. Mr. Lafont will become the new CEO and Thomas Aebischer, the chief financial officer of Holcim, is slated to take the same role at the new company.

Bernard Fontana, Holcim’s chief executive, was asked to be the co-chair of the integration committee, but there seems to be no place for him in the merged company. Officially, Zurich will become the home base, but Paris will remain the registered headquarters. Which company functions will go where remains unclear.

“A well-balanced division of corporate functions between Switzerland and France will enable an efficient cooperation throughout the new globally positioned company,” said an unhelpful Holcim press release.

But the former boss of Holcim, Max Amstutz told the New Zürich Zeitung newspaper, he replied: “The battle for power and influence has already begun. Redundancies are planned.”

Christian Arnold, an analyst at the Swiss bank Vontobel, says the merger was a cheaper solution for Holcim shareholders, who would have had to pay a premium to take over Lafarge. He, too, expects friction, particularly at the beginning of merged operations, but is optimistic about the combined company.

The battle for power and influence has already begun. Redundancies are planned. Max Amstutz, Former Holcim boss

“The industrial logic of the merger is compelling,” he said, noting the combined company will be the dominant player in the cement market.

Mr. Arnold also sees operational advantages. Cement production is best carried out close to where it is used and the merged firms have a uniquely dense network of plants worldwide. “The closer a plant is to the construction site, the less transportation costs there are,” he said. “The new joint company can supply cheaply and still earn a sufficient margin.”

The merger should also help to tackle the overcapacity problems that the industry has been suffering since the financial crisis.

But it is not yet clear how the promised synergies between the companies will generate the promised €1.4 billion in extra sales. Rigorous cost reductions will amount to only €200 million, and even here, the company is low on detail about just how the costs are cut.

Little is being said about the  controversial issue of “personnel reduction.” Mr. Lafont would rather tour Europe as a champion of the merger. Reports of a centralized culture at Lafarge and a decentralized culture at Holcim are exaggerated, he says, adding something new will emerge from the merger.

With the merger scheduled for completion by late June, these unanswered questions won’t disappear as easily as a water-soluble cement bag.


The author is Handelsblatt's correspondent in Switzerland. To contact the author: [email protected]