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CRH buying into India – Whatever next…?
Written by Peter Edwards
29 July 2015
Ireland's CRH this week submitted a binding bid for various Indian assets of LafargeHolcim that will be sold by the newly-formed group as a condition of its formation. CRH will compete for the assets with HeidelbergCement and Barings Private Equity, which sold its stake in the same assets to Lafarge India prior to the merger. According to the Irish Examiner, the scale of the bids is in the region of US$600 - 800m. On the back-burner is another deal that could see CRH snap up a 74% stake in Tongyang Cement and Energy in South Korea.
These moves are consistent with CRH's new-found commitment to rapid expansion into new markets and an apparent desire to become a far bigger player in the global cement industry. It is in line with the sentiment expressed by its CEO Albert Manifold back in February 2015, when he stated in a letter to shareholders that CRH had given 'hell or high water commitments to Lafarge and Holcim' regarding its earlier Euro6.5bn purchase of assets as part of the LafargeHolcim merger. At that point CRH appeared almost 'over committed' to the huge deal, with some analysts asking whether or not CRH had paid too much.
Let's stop a minute to look at where CRH finds itself. Europe, its main cement market, is still under siege from a general lack of investment, both private and public. The UK is likely to perform well, although an ongoing Competition Enquiry at Irish Cement is an unwelcome distraction. CRH's new eastern European ventures are all in fairly small markets. Poland, in which CRH operates Grupa Ozarow, appears to act as the model for these acquisitions, but they remain at risk from the prolonged Eurozone crisis.
In Brazil, another new market, CRH is 'up against it,' with massive competition from Votorantim and InterCement, smaller local players and LafargeHolcim. A decline in cement demand here so far in 2015 year-on-year is not a good omen. Neither is Votorantim's decision this week to turn one of its plants into a distribution centre due to continued low demand.
In Canada CRH will gain 3.1Mt/yr of former Holcim capacity, around 20% of that market's capacity. This, along with its 2.7Mt/yr acquisition in the Philippines, probably represents CRH's best opportunities out of its newly-acquired assets.
However, with the confirmation that it intends to invest in 5Mt/yr of former Lafarge assets in India, a market not exactly enjoying buoyant conditions at present, CRH appears to be further exposing itself to another 'sub-optimal' market. We recently reported on the 100Mt/yr of capacity that is sitting idle in India at present , hardly a situation to instil confidence in a new entrant.
Whether CRH will be forced to leave some of these markets, buy into others or otherwise shuffle its cement assets to better suit the world economy remains to be seen.
Meanwhile, on the other side of the aforementioned mega-deal, LafargeHolcim gave the first indications of how it will go about re-branding in various markets this week. While a new brand will be introduced in markets with 'a balanced overlap' of former Lafarge and Holcim assets, countries without overlap will see existing Lafarge or Holcim 'brands' become 'endorsed' by LafargeHolcim. In countries with unbalanced overlap, either Lafarge or Holcim will be the endorsed brand.
Of course, in every market that it has bought a LafargeHolcim asset, CRH will also have to re-brand. So far it has announced that its operations in France will be branded as 'Orsima' from 1 August 2015. No elaboration on how this name was derived has been provided, but let's hope that there are not too many other new names to remember!
HeidelbergCement to buy Italcementi for Euro3.7bn 29 July 2015
Germany/Italy: Germany's HeidelbergCement plans to buy rival Italcementi for Euro3.7bn as it puts its repaired balance sheet to work to follow LafargeHolcim down the path of consolidation, according to Bloomberg.
HeidelbergCement has initially bought Italmobiliare SpA's 45% stake, paying Euro10.6/share or Euro1.67bn total in stock and cash. This transaction was initiated on 28 July 2015 and is subject to approval by competition authorities. HeidelbergCement will next offer the same price for each share held by outstanding investors, once the first transaction has been cleared. The price offered for each share is 61% higher than Italcementi's closing price before the deal was announced.
The deal represents HeidelbergCement's biggest since the Euro11.2bn acquisition of Hanson in 2009. CEO Bernd Scheifele has managed to give the company more breathing space from the debt built up in that ill-timed takeover, allowing him to pursue an expansion just weeks after Holcim and Lafarge completed their industry-transforming merger of the biggest cement companies in Switzerland and France. Analysts have suggested that the Italcementi acquisition could backfire and hurt earnings.
The acquisition of Italcementi will expand HeidelbergCement's operations in Mediterranean countries such as Italy and Egypt as well as in France and Belgium, which combined represent the Bergamo, Italy-based company's biggest market. "With the market recovery gaining traction in southern Europe and the US, it is now the right time for us to accelerate our growth," said Scheifele. The deal gives HeidelbergCement the greatest boost in the Middle East and Africa, doubling its market share in that region to a similar level to Dangote Cement, according to data compiled by Bloomberg Intelligence. However, it will still lag behind LafargeHolcim there.
HeidelbergCement expects annual synergies of Euro175m by 2018 from the acquisition. The deal will initially be financed through cash and fully underwritten bridge financing of Euro4.4bn by Deutsche Bank and Morgan Stanley. That will partially be repaid by Euro1bn in asset sales and new debt sales. As a result of the takeover, HeidelbergCement expects revenue to top Euro20bn 2020, with earnings before interest, taxes, depreciation and amortization of more than Euro5bn. That compares with earlier goals of Euro17bn and Euro4bn respectively. HeidelbergCement's 2014 revenue was Euro12.7bn, while Italcementi generated Euro4.2bn.
US: Essroc, part of Italcementi, has acquired the Holcim (US) slag cement grinding plant in Camden, New Jersey, according to MarketLine. As part of the transaction, Essroc will also obtain Holcim's cement terminal in Everett, Massachusetts, US. Upon completion of the transaction, Holcim's staff in Camden and Everett will join Essroc. The transaction is expected to be completed later in 2015. The acquisition will allow Essroc to strengthen its position in the sustainable building products market.
Grupo Cementos Chihuahua secures US$194m loan 29 July 2015
Mexico: Grupo Cementos Chihuahua has secured a five-year loan of US$194m to refinance debt, according to Esmerk Latin American News. The company is rolling over a syndicated loan due to expire in 2018.
Germany: HeidelbergCement has reported a double-digit rise in revenue and earnings as its sales volumes of building materials benefited from a continued market recovery in North America and the UK, offsetting concerns about weakness in Indonesia, according to Dow Jones.
Its net profit for the second quarter of 2015, which ended on 30 June 2015, rose by 16% year-on-year to Euro271m, while its operating income before depreciation grew by 15% to Euro752m. HeidelbergCement's revenue jumped by 10% to Euro3.64bn, fed by the weak Euro and low fuel costs. Excluding currency and consolidation effects, its revenue increased 0.4%.
"The sustained recovery in our mature markets, particularly in the UK and the US, has made a significant contribution," said CEO Bernd Scheifele. However, a delayed start of infrastructure projects in Indonesia, HeidelbergCement's key market in Asia, led to a decline in sales volume in the Asia-Pacific region.
On 28 July 2015, HeidelbergCement announced plans to take a 45% stake in Italy's Italcementi for Euro1.67bn. To reflect the positive impact of the deal, HeidelbergCement raised its mid-term targets. It now aims to generate more than Euro20bn in revenue by 2019, compared with the Euro17bn it had previously forecast, alongside an operating earnings of more than Euro5bn, compared with the Euro4bn it had previously forecast. For the entirety of 2015, HeidelbergCement has confirmed its guidance of a significant increase in revenue, operating income and profit.