The world’s biggest cement producer Lafarge and multinational mining company Anglo American are forming a 50/50 joint venture in the UK by pooling their resources in quarrying, asphalt, cement and contracting businesses.
The combined unit of Tarmac UK and Lafarge UK will boast will have a total revenue of £1.8 billion. The entity will have a employee strength of 7,300 people and would have reported an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) of £210 million in 2010.
Lafarge will nominate the chief executive in the yet-to-be-named entity while Anglo will appoint the finance director. It will have an independent chairman and its own board.
In the tough UK construction market, the non-cash deal makes a win-win proposition for both parties, said Lafarge chief executive Bruno Lafont. “It is not an exit from the UK. It is a value-creating deal”, he said to FT adding “If we do nothing, each company on its own will continue to shrink and shrink”.
Mr. Lafont estimated the UK construction market to have shrunk by 25% from the pre-financial crisis period of 2008. Anglo American has been trying to sell its UK assets unsuccessfully for the last three years in a declining market.
The deal will create “more opportunities than risks in a very depressed market” said Mr. Lafont adding the deal will enhance earnings in the first full year.
“While Anglo American’s objective remains to divest its interests in the joint venture over time, this transaction positions us well to maximise value”, said Anglo’s chief executive Cynthia Carroll in a statement. The merger will save £60 million in costs for the company, making it more attractive for an potential takeover, thus facilitating Anglo’s eventual exit from the business.
However, bankers knowledgeable with the construction sector warned that the deal may come under regulator’s lenses and the competition watchdogs may force it to sell assets before the tie-up.
“The expectation is that there should be a minimum of five large players in the UK heavy side market. When I looked this morning, there was only four”, said a construction sector banker.
“It’s likely that they will have to appease the competition commission by breaking up bits of the business”, he added.
Both the parties have agreed to the option of either selling their stakes or opting to go public and get the company listed. They have agreed “to pursue an initial public offering of the joint venture within one to two years of the deal completing”, said Rene Medori, a director with Anglo American.
Anglo’s assets contribution in the joint venture generated sales of about £1.1 billion, while Lafarge’s assets generated sales of around £700,00o. However, Lafarge still get equal holding because its assets have better profitability.
Lafarge has completed three non-cash deals in recent years, including the latest one. The company has been cutting its exposure in the developed market as part of its strategy and growing its exposure in the emerging markets.