Long-planned merger of two cement giants on shaky ground

On Sunday afternoon a week ago, Bruno Lafont, the chief executive of Lafarge took a call from Wolfgang Reitzle, the chairman of Swiss cement company Holcim, seeking to merge with its French rival. He had bad news.

Reitzle had just sat through a board meeting at which the panel voiced its increasing dissatisfaction with the merger terms, not least with Lafont’s future role as leader of the combined entity. A letter had been drafted, Lafont heard down the line, demanding far-reaching changes, including his scalp.

Lafont was stumped. Just two days earlier, teams from both companies were still poring over the merger’s progress in meeting rooms at Roissy airport near Paris. While the underperformance of Lafarge compared to Holcim in recent months hadn’t escaped attention, the Lafarge group wasn’t prepared for this. With the Swiss going on the offensive via a letter that questioned Lafont’s credentials, the creation of an industry leader, the pinnacle of his career, risked crumbling.

The demands from Switzerland, an escalation that brushed aside boardroom etiquette in favour of open rebellion, exposed the rift separating the companies. The deal, built on a notion of equality less than a year ago, had rapidly descended into personal animosities and a widening gulf between Holcim and Lafarge, both financially and culturally.

The 1:1 share-exchange ratio turned into a disadvantage for Holcim, which has outperformed Lafarge, on average, in sales, profit, and cash from operations since the merger was announced last April. Yet the French company stood to be the bigger loser if the deal fell apart as it would face increased competition from its Swiss rival.

At least four billionaire stakeholders from Switzerland to Belgium, Egypt, and Russia, had large amounts of money at stake, and senior managers and shareholders also had a lot riding on the deal. Thomas Schmidheiny, the single biggest Holcim shareholder with a 20% stake, sought to smooth ruffled feathers at the Sunday meeting, while other board members insisted on pushing ahead with the letter.

A sense of unity had been equally absent in the executive suites of Lafarge and Holcim, where the leaders of both companies failed to get along with with one another from the get-go. Lafont is known for being direct, with an appetite for big deals.

Lafont considered himself the natural choice for the enlarged group, even if it meant relinquishing the combined titles of chairman and chief executive.

After speaking with Reitzle on Sunday, Lafont remained defiant. He had come too far to let the deal fall apart at the last moment. The French side lurched into action. Lafont himself called an emergency board meeting on Sunday night. There in Paris, the gathered executives studied the demands in greater detail to plot their response.

At the same time in Ireland, Albert Manifold was growing nervous. The chief executive of building materials company CRH had staked his company’s future growth on the deal going through, hoping to pick up lucrative pieces that the duo was forced to sell to appease competition authorities. Now, with an agreement teetering on the verge of breakdown, CRH’s grand ambitions stood on shaky ground, days before shareholders were set to vote on the deal.

Time was running out if both sides wanted to salvage the merger and see through the asset disposal. On Monday morning before trading started in Paris, Lafarge put out a brief statement signalling a willingness to explore a revision of the exchange parity. It wouldn’t, however, amend other terms, the French side made clear. Holcim also issued a release, insisting management structures also come under review.

The Lafarge camp now faced the choice of digging in and watching the merger fail, or finding a new role for Lafont that would help him save face and still keep the running of the company in the hands of the French. There was no obvious fallback candidate that Holcim would easily accept.

As the week wore on, Lafont was keen to preserve an air of business as usual. In Paris at the headquarters, the mood was bleak, with managers feeling they were being unfairly accused of obstructing the biggest cement deal in history.

Seeking to overcome the stalemate, Reitzle, 66, invited Lafont for lunch on Tuesday. At the meeting, German-born Reitzle, who sports a pencil-thin moustache and has a taste for the finer things in life — from bespoke suits to opulent balls to fast cars — sought to guide Lafont onto a path that would satisfy everyone involved. The two men discussed the option of Lafont becoming co-chairman, while another Lafarge manager would lead the company, under their combined stewardship.

A skillful negotiator with decades in the upper echelons of corporate Germany, Reitzle enjoyed the backing of the Holcim board. Lafont agreed to consider the proposal. The French executive knew he couldn’t insist on the chief executive post. By Thursday, with Reitzle flown into Paris to help patch things up, he had come around. Lafont faced his troops in Paris with a speech in which he vowed to do what was needed to see the combination through.

Assuming it would remain a merger of equals, Lafont said he would be ready to make his contribution in the most useful way.

By that time, CRH had held its shareholder meeting in Dublin without any major hiccups, with Manifold laying out an alternative path should the Holcim-Lafarge merger fall through.

Behind the scenes, executives and advisers were racing to prevent that scenario from unfolding. Each day of the week, the boards of both companies had met, some in person, others piped in via phone, to keep the process humming along. Executives, advisers, and lawyers shuttled between Zurich, London, and Paris, giving meaning to the merger’s code project name, “cities.”

As darkness fell over Paris, the two sides assembled in a non-descript city office to preserve an air of neutrality and drafted a new agreement: Holcim would give 0.90 of a share in return for one share of Lafarge, instead of the original 1:1 ratio, valuing the French company at €28.2bn. Lafont would become co-chairman, and the boards also agreed to leave out the contentious point of who would be chief executive as they drafted a shortlist.

After midnight, the firms signed off on the new terms. A few pleasantries and handshakes were exchanged, with just a few hours to spare before Holcim and Lafarge announced their revised accord to the public, keeping the merger alive — for now.

Bloomberg


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