Paris/London: In less than a year, Lafarge SA chief executive officer (CEO) Bruno Lafont has fallen from celebrated co-architect of the world’s biggest cement merger to one of the deal’s main obstacles.
Holcim Ltd, which in April agreed to a $40 billion merger with Lafarge, is pushing for an executive other than Lafont to lead the new entity, according to people familiar with the matter. The Swiss company is questioning his ability to reach saving targets because Holcim has outperformed Lafarge on everything from sales to profit since the deal was announced, they said. Lafont and Holcim managers have also clashed over issues including strategy, they said.
The dispute over leadership by the 58-year old Frenchman shows how a clash of personalities can become the biggest liability in mergers. The gum-chewing, cigar smoking Lafont and the soft-spoken Holcim CEO Bernard Fontana, who was due to remain in his post until the merger completion, have disagreed on key issues from the start, one of the people said.
Holcim on Tuesday said it won’t pursue the planned combination in its present form and wants Lafarge to accept management changes and a stake of less than the initially agreed 47% in the combined business. Paris-based Lafarge, in turn, said it’s willing to compromise on the exchange ratio, though not on leadership or other terms. Both companies declined to comment on any differences beyond their official statements.
Sharing control
For Lafont, becoming CEO of the combined entity would mean handing greater control to other executives as he would relinquish the combined titles of chairman and CEO, which he’s held at Lafarge for eight years.
While Lafont is an experienced deal maker, some of his acquisitions turned sour. In 2007, he oversaw the purchase of cement operations from Egypt’s Orascom Construction Industries for €10.2 billion ($11 billion), saddling the company with debt just as construction activity slowed.
The debt eventually led to Lafarge losing its investment grade status. It also increased its exposure to countries that have recently been hit by war, terrorism or political turmoil, including Egypt, Irak, Syria and Nigeria, raising concerns among some investors about Lafont’s strategy.
Tough calls
Still, the current haggling over leadership and terms isn’t a surprise because Lafarge’s weaker position has emboldened Holcim shareholders to seek better terms, according to several investors.
“Ultimately, it is a question of control, with Holcim aiming to extract a greater say in the new company,” said Robert Gardiner, a analyst at Davy. “And change in the proposed CEO may suggest some difference of opinion in future direction.”
Lafarge advisers are concerned that Holcim is using the management demands as a reason to reduce the price of the deal or kill it altogether, one person said. Finding a Lafarge executive other than Lafont to run the combined entity could be difficult, that person said.
Lafont, who joined Lafarge in 1983, hasn’t been afraid to make tough calls on cutting costs and achieving savings targets in the past. He sold Lafarge’s gypsum operations to trim debt that had been inflated by the Orascom deal. In 2006, the year he was appointed CEO, he decided to sell Lafarge’s roofing business while spending $3.5 billion to buy the remainder of the company’s North American business.
Declining revenue
Holcim and Lafarge have predicted the merger will lead to cost savings of €1.4 billion annually, giving them an advantage over rivals as the global recession has eroded demand for building materials and forced some kilns to run at a loss.
Uncertainty over the terms of the merger and concern that it could still collapse triggered a 6.3% decline in Lafarge shares in Paris trading. Holcim lost 1.3% in Zurich.
While both Holcim and Lafarge have experienced declining revenue and cash flow, Holcim has had less of a slide since the deal was agreed, on average. And Holcim’s Ebitda margin—or the earnings before interest, taxes, depreciation and amortization it reaped on sales—exceeded Lafarge’s in the period, on average.
If the merger fails, Holcim-Lafarge would join a growing list of mega-deals involving European companies that have collapsed before completion.
Failed mergers
Last year, Publicis Groupe SA and Omnicom Group Inc. called off their $35 billion merger of equals amid disagreements over the management of the combined firm, which would have been the world’s largest advertising group. In 2012, BAE Systems Plc and the company now known as Airbus Group NV were forced to scuttle a deal they said would transform the European aerospace sector, after German chancellor Angela Merkel objected.
Representatives for Holcim and Lafarge met today and while there was progress on reaching a compromise, outstanding disagreements remain, one of the people said. Still, the companies should have addressed their dispute earlier, said Sanford C. Bernstein analyst Phil Roseberg.
“The boards are not nearly as united as we expected,” he said in a note to investors, adding that “this very public showing of disunity” has put the deal at risk. Bloomberg
