LafargeHolcim, the Franco-Swiss cement group created by a €41bn merger last year, is stepping up its post-deal disposal programme with planned asset sales in an another nine countries.
Eric Olsen, chief executive, has been under pressure from some investors to boost the group’s performance, which has been hit by severe global pricing pressures and weak economic growth in key markets.
Shareholders had been promised SFr3.5bn ($3.6bn) of disposals this year. But the company now says a portfolio review has identified a further nine countries “where we will seek opportunities to divest if we can achieve favourable valuations”.
LafargeHolcim said it was confident of delivering this year’s target “and expects further divestments to crystallise beyond 2016.”
Shareholder scepticism about the benefits of last year’s tie-up between France’s Lafarge and Switzerland’s Holcim — which succeed only after a series of internal power struggles — has weighed on the group’s shares, which are almost 40 per cent lower than a year ago.
With a global capacity glut in the cement industry, Mr Olsen believes LafargeHolcim significantly over-invested in the past and is shifting the combined company’s business model towards lower capital spending and stronger cash flow generation.
Asset sales will help LafargeHolcim reduce net debt but analysts have warned that a rush to push through disposals would lead to lower sale prices.
“I don’t see how this process will create value — but that is the story of this merger so far,” said Phil Roseberg at Bernstein. “It is a very complex integration. You had two similar sized companies with two different cultures and now they want to create a third culture.”
So far this year, the Zürich-headquartered company has already secured a third of its SFr3.5bn disposal target, through divestments in South Korea and Saudi Arabia and a merging of operations in Morocco. Competition authorities have required additional asset sales in India.
LafargeHolcim, which operates in about 90 countries, has not set out where the next round of disposals will occur but it is expected to quit operations in most of the chosen locations completely.
However, one country where LafargeHolcim is investing for longer-term growth is Brazil, despite the country’s economic downturn hitting its results in recent quarters.
Last month, the group opened a SFr570m plant in Barroso, south-eastern Brazil, which has the capacity to produce 3.6m tonnes of cement per year. It first took the investment decision in 2011.
Although it does not expect an early turnround in Brazil’s economic prospects, the company believes the new plant will cut production costs. It recently helped in the construction of the Olympic Village for this year’s Rio de Janeiro games.
For the first quarter, LafargeHolcim reported a larger than expected 21.5 per cent annual fall in adjusted earnings before interest, tax, depreciation and amortisation, to SFr824m.
But the group argued that the construction industry in North America and Europe was often hit by bad weather in the early months of the year, meaning the quarterly results were “not indicative” of expected full-year performance. Mr Olsen said then that he expected to see “momentum building through the year”.
He has forecast “at least a high single-digit” like-for-like increase in adjusted operating ebitda in the group’s full-year results.
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