There's a long, uphill slog that cement makers Holcim (NASDAQOTH:HCMLF) and LaFarge (NASDAQOTH:LFRGY) need to travel before their recently announced merger is successfully completed, but should it navigate the many hurdles before them, look for Mexican cement giant Cemex (NYSE:CX) to be one of the ultimate beneficiaries.
Zurich-based LaFarge and Paris-based LaFarge are the world's two largest cement companies with combined revenues of $44 billion and a market share north of 50% in some countries. If the deal goes through, Germany's HeidelbergCement (NASDAQOTH:HDELY) would be a distant second, with $18 billion in revenues, and Cemex would come in third at $15 billion.
To satisfy regulators, it's expected the cement giants would need to shed enough assets to satisfy regulators in at least 15 jurisdictions, including the U.S., even though the new LaFargeHolcim as it would be called would have a much smaller presence here than elsewhere around the world. Both Heidelberg and Cemex may very well be able to pick up some of the $6.9 billion in key assets at fire-sale prices their rival will be forced to cut, and I'd question whether creating a behemoth of the size being contemplated would work in their favor, meaning its rivals could steal share as well.
The industry is already heavily consolidated into the hands of the four cement companies as it is, and their operations have come under scrutiny from regulators in Europe who accuse them of acting like a cartel over the past few years. Moreover, they're also probing Holcim's deal to buy Cemex's cement plants in Germany as well as its stake in Cemex's Spain facilities as it still gives them a 25% stake. France alone could be problematic as it's dealing with an unemployment rate of around 11% and work rules that infamously favor the country's labor unions.
While Holcim and LaFarge feel the deal can be completed by the end of 2015, the intricacies and the side dealings that are necessary for it to come to fruition may take much longer, with analysts saying "years" is the likely time frame to expect.
Two-thirds of the anticipated divestures are expected to occur in Europe, which would bolster Cemex's presence on the continent. It currently realizes about 41% of its revenues from Mexico and the U.S. and just 26% from northern Europe. Picking up even half of the proposed assets would make its European division just as large as those in the Western Hemisphere.
I'm not certain Holcim and LaFarge will be able to conclude their deal. There are so many fingers in the pie, let alone all the other regulatory moving parts and interests that would be opposed to the transaction, that I find it hard to believe they'll succeed. Yet if they do, I'd expect Cemex to cement its own place as the ultimate winner.