By Ruma Dubey

After the big pharma desi deal between Sun and Ranbaxy, the other big news of consolidation is that of Switzerland’s Holcim and French Lafarge.  

This merger, when it happens, will go on to create a cement giant, with combined sales of around Rs.2.6 trillion, with more than 136,000 employees in 90 countries. The merger is expected to bring in many benefits – cut costs, bring down debt and together deal with rising fuel costs and falling demand. It is also expected to remove a lot of spare capacity from the sector around the world and help consolidate the market world over. The merger is sure to send a chill down the spines of other big global players – Mexico’s Cemex, Germany’s Heidelbergcement and Anhui Conch Cement of China. And in India, UltraTech Cement would be watching how this progresses with great apprehension.

Once the deal goes through, Holcim will launch a public takeover for Lafarge, payable in shares. The combined new giant will be headquartered in Switzerland but will have operations headed from both France and Switzerland. The current CEO of Lafarge, Bruno Lafont will become CEO of the combined entity, while the chairman will be Swiss Wolfgang Reitzle, currently a board member at Holcim.

Both the companies are backed by billionaire shareholders. Holcim is controlled by two major shareholders - Thomas Schmidheiny (Swiss entrepreneur who was listed as by Forbes magazine as the 255th richest person in the world and 4th richest person in Switzerland as of 2012) and Filaret Galchev from Russia (ranked 204^th richest in the world by Forbes) control a total of 31%. In Lafarge, the two biggest shareholders are Groupe Bruxelles Lambert and Egyptian tycoon Nassef Sawiris who together own 37% stake.  Interestingly, Lafarge’s debt is rated as junk by Standard & Poor’s and Moody’s – it is sitting on a gargantuan debt of $10.3 billion.

A deal as big as this, it is sure to bring in not just the CCI in India but competition watchdogs around the world. This merger is expected to draw anti-trust issues from all over – USA, UK, Europe, Brazil, Canada, France, Morocco, Philippines, Ecuador. Thus the biggest priority which could make or break this mega deal is how they deal with the antitrust concerns across the world. Just as CCI would expect the companies to sell cement plants and distribution facilities before approving any merger, the same is expected to come from all these countries.

Cement stocks in India – especially Ambuja and ACC which are Holcim units have not exactly been scaling new highs on the Indian bourses post this news, neither have the other listed cement companies. At this juncture one does not know if the deal will go through. As such the CCI has been riding hard on the back of cement companies, where in 2012; it imposed a fine of Rs.6300 crore on the top 11 cement makers of India on charges of cartelization.  So this merger going through easily in India seems unlikely.

Holcim and Lafarge are confident that the deal will be sealed and done before June 2015, which is indeed being too optimistic. Remember the BHP Billiton-Rio Tinto mega-deal in mining? It is another issue that it did not happen at all but the promoters were thrashing antitrust issues all around the globe for almost 18 months before BHP decided to kill the merger.

Let’s see how this wind blows and what new equations emerge in the Indian cement sector. Undeniably, it is set for a major consolidation.

A quick run through facts which will bother CCI:

• The merger will create the largest cement company of India, controlling 18% of India’s total cement capacity of 368 MT.
• Two main companies will dictate prices and supply – Lafarge-Holcim and UltraTech
• East Indian cement market will undergo major change – Holcim (via ACC and Ambuja) already has 23% market share and Lafarge holds sway over 16%. Thus 39% of the cement market will be controlled by one company post the merger.
• CCI will have to investigate market share of the combined entity in each state and region to ensure that no where does it have a monopolistic position – the places where it does, CCI might ask the companies to redistribute by selling assets/plants.