Antitrust Hurdles Loom Large for Giant Cement Merger

Updated, 3:09 p.m. |

PARIS – Investors offered cautious approval for the merger plan of the world’s two biggest cement companies on Monday. But analysts seemed more skeptical about the wisdom of the deal — and whether the companies would be able to sell the merger to more than a dozen global antitrust regulators that will have a say in the matter.

The companies, Lafarge, based in Paris, and Holcim, with headquarters in Jona, Switzerland, said on Monday that by joining forces they would eventually generate annual savings of $1.9 billion and create ‘‘the most advanced group in the building materials industry.’’

It would certainly be the biggest: The two, already giants in cement and related products like stone, gravel and sand, last year posted combined sales of about $44 billion. That was more than double those of Heidelberg Cement, the German company that is No. 3 globally.

Shares of  Lafarge closed about 2.6 percent higher in Paris, while Holcim’s stock rose 1.6 percent in Zurich.

To see the deal to completion, though, Holcim and Lafarge will need to persuade regulators in 15 jurisdictions that they are prepared to reduce overlap in regions where their combined market concentration reduces competition.

In the United States, for example, the Mexican company Cemex is the current market leader, with a 14.2 percent share, according to the Portland Cement Association, which represents the industry in America. Holcim ranks second, though, and Lafarge seventh in the United States. But a combination would catapult the companies into first place with an American market share of more than 21 percent.

Cement’s economics — it has a relatively low value and is expensive to transport — mean that long-distance exports are usually not profitable. So European producers do not have to compete with imports from lower-cost producers in places like Asia.

The European Commission, the European Union’s executive arm, is already investigating Holcim’s deals with Cemex, the Mexican giant, in Spain and Germany on antitrust grounds.

The European cement industry is already heavily concentrated and has periodically been the subject of antitrust investigations since the 1970s, according to Dave Anderson, an antitrust partner in the Brussels law office of Berwin Leighton Paisner.

The European Commission opened a cartel investigation in 2008 into ‘‘all of the main participants in Europe, including the merging partners,’’ Mr. Anderson said. That case is still dragging on today, he said.

Analysts said that it was likely that the Holcim-Lafarge merger would come under particular scrutiny in Germany, Britain, France and Spain.

Rolf Soiron, the Holcim chairman, said at a press conference Monday in Paris that the companies would move ‘‘immediately’’ to begin addressing regulatory concerns, with a goal of closing the deal in the first half of 2015. He said the companies planned to divest themselves of assets that produced about $6.9 billion of annual revenue, ‘‘mostly in Europe.’’ But it is ‘‘too early to get into the details’’ of identifying which assets will be sold, he said.

Some analysts were skeptical about the companies’ projected timetable for completing the merger.

‘‘The complexity and ambition of this merger is going to challenge their ability to manage the integration,’’ said Arnaud Palliez, an analyst with Raymond James Euro Equities.

And the timing of the companies’ asset disposals ‘‘is just their estimate at this point,’’ Mr. Palliez said. He predicted it would take around 18 months to complete the North American pieces of the deal.

Mr. Palliez said the companies could increase efficiency in Europe, where the industry is operating at  about 55  to 60 percent of capacity, and that their businesses would complement, rather than overlap, in the Middle East, Africa and Latin America.

But he said that it was not entirely clear what more the companies hoped to achieve. At the moment, the proposed deal ‘‘raises more questions than answers,’’ he said.

But Mr. Soiron, the Holcim chairman, said the companies’ challenge was to either ‘‘build a European world champion’’ or ‘‘to lose Europe.’’ There is ‘‘a singular window of opportunity’’ to combine in a way that strengthens both, he added.

Bruno Lafont, chief executive of Lafarge, stressed that the point of the deal was not so much to cut costs as to rebalance operations to better compete internationally and employ capital. He played down concerns that the deal would bring major job cuts in France, saying the overlapping businesses would be sold, not shut down.

Mr. Lafont said Holcim and Lafarge had carefully prepared, and ‘‘we are quite confident’’ that ‘‘the timeline is credible.’’

Talks began in January and the boards of the two companies met on Saturday, agreeing unanimously to a ‘‘merger of equals,’’ in which each Lafarge share will be exchanged for one new Holcim share, creating a new entity to be called LafargeHolcim. It will be based in Switzerland, with the shares listed on both the Zurich and Paris exchanges.

The European cement market grew robustly during the credit bubble before the global financial crisis, with construction in countries like Spain and Ireland booming.

With Europe struggling to maintain even modest economic growth, the balance of the global cement market has long since shifted to emerging markets, particularly China and India, which now make up about 90 percent of worldwide demand, according to Global Cement, an industry publication. The United States, Japan and Europe account together for most of the remainder.

While Holcim and Lafarge rank No.1 and No.2 in terms of sales, a Chinese company, Anhui Conch,tops the global tables in potential output, with capacity of 227 million tons a  year.

But the combined LafargeHolcim would dwarf that, at about 427 million tons worldwide, Mr. Soiron said.

Mr. Palliez said it was probable that there would be global repercussions from the deal, as rivals either seek their own mergers to attain scale or try to pick up the divested assets at a bargain price, and it will challenge the industry, which has been trying to hold down costs, to maintain its fiscal discipline.

Keith Bradsher contributed reporting from Hong Kong.