HeidelbergCement has finally provided a little more detail about its acquisition of Italcementi with the releases of its preliminary results for 2015. The key message is that all is well. Expected savings from the takeover are growing, less borrowing is required to make the purchase and the approvals from competition commissions around the world are rolling in.
Looking at the cost savings first, the potential for synergies or operational savings was first estimated at Euro175m at the time of the takeover announcement in late July 2015. At that time HeidelbergCement hoped to be able to deliver almost 30% of this figure in 2016. If it goes ahead this will sweeten the honeymoon period considerably following the completion of the deal. The largest savings were expected to come from the commercial area and in purchasing.
This figure then grew to Euro300m at the time of HeidelbergCement’s third quarter results in November 2015. Now, the effects of financing costs and taxes were included. At this point some more strategy about how HeidelbergCement was planning to use Italcementi’s resources started to emerge in the synergy calculations. HeidelbergCement intends to use its global trading business with Italcementi’s ‘export orientated’ cement plants. Import demand, for example in North America or Africa, that used to be bought from third party sources previously, can now be supplied by Italcementi’s plants after the merger, meeting demand and holding capacity utilisation rates up. With the publication of the preliminary results for 2015 the savings figure has grown to Euro400m with little explanation. If only it were that easy to find Euro100m down the back of my sofa.
The financing has also been proceeding smoothly. The loan value required for the takeover has fallen from Euro4.4bn to Euro2bn. Reasons for this include the exclusion of the risk of a mandatory takeover offer to minority shareholders in Morocco, some of Italcementi’s creditor banks agreeing to waive their change of control clauses and the issuance of a Euro625m bond in January 2016. The bridge financing, available initially from Deutsche Bank and Morgan Stanley, remains at Euro2.7bn.
Finally, competition commission approval has been granted in India, Canada, Morocco and Kazakhstan. Despite holding a cement product capacity of 10.5Mt/yr in India with 4.1Mt/yr additional capacity in development, this was unlikely to be a problem in India, with its total national capacity of 280Mt/yr. The commission implemented the Elzinga Hogarty Test and concluded that there is sufficient competition.
This leaves the possibly trickier approvals outstanding in Europe and the US. Belgium is likely to be the main issue in Europe given that the two companies run 73% or 4.5Mt/yr of the market in production capacity. Divestments are expected here.
In the US, precedent should save HeidelbergCement from interference. HeidelbergCement’s and Italcementi’s combined cement production assets will give it a production capacity of 16.4Mt/yr or around 14% or market share. This will make it the second biggest producer in the country after LafargeHolcim which had its merger approved in 2015. There are no obvious overlaps in their clinker production assets except for a minor one in Pennsylvania which holds both the 2Mt/yr Ordinary Portland Cement Essroc (Italcementi) Nazareth Plant and the 0.13Mt/yr Lehigh White Cement (HeidelbergCement). These two plants are unlikely to be considered in competition with each other.
So, continued smooth sailing is expected for the takeover. Since most of the information regarding the acquisition has come directly from HeidelbergCement it was unlikely to appear otherwise. Let’s see whether this remains the case when Italcementi releases its financial results for 2015 later in the week on 19 February 2016.