Lafarge buys Orascom Cement for €10bn

Bruno Lafont, chief executive of Lafarge, on Monday demonstrated his emerging market ambitions with the surprise acquisition of the Middle East’s largest cement maker in a highly-leveraged deal valued at €10.2bn ($15bn).

In his first significant strategic move since becoming chief executive of the French group two years ago, Mr Lafont will pay €8.8bn and take on €1.4bn in net debt to buy Orascom Cement, a nine-year old company that has built leading positions in the Middle East and Mediterranean basin largely through greenfield investment.

The deal marks a real transformation in Lafarge’s global footprint, shifting the majority of earnings to high growth emerging markets, which account for more than two-thirds of the world’s cement consumption.

But it also represents a significant windfall for Orascom’s parent company Orascom Construction Industries, the quoted group run by Egyptian businessman Nassef Sawiris.

OCI investors will receive an $11bn special dividend, while Mr Sawiris will reinvest €2.8bn in Lafarge to take an 11.4 per cent stake through NNS Holding, his family investment company. “It’s shareholder value before empire building,” Mr Sawiris said on Monday.

Mr Lafont, too, stressed the potential of the deal, saying it would be earnings accretive from year one, and pledged himself to ambitious performance targets.

Earnings per share are now expected to be almost doubled by 2010 from €7.86 in 2006 to more than €15, return on capital employed would rise to more than 12 per cent against 9.4 per cent last year, and finally the combined group would generate free cash flow of €3.5bn against €1.4bn a year ago.

Highly profitable, with operating margins estimated at more than 40 per cent next year and benefiting from an unusually low tax rate of 5 per cent, Orascom Cement is forecast to generate sales of $2.6bn next year to add to Lafarge’s €17bn. Mr Lafont said cost savings and operational benefits of combining the businesses would amount to €150m a year by 2010.

Orascom Cement’s strong financial position helped Lafarge to secure €6bn in financing from the debt markets to fund the deal, in spite of the credit squeeze.

Mr Sawiris said his company had decided to sell the cement business – accounting for 71 per cent of earnings in the first nine months – to focus its financial power on other activities such as construction and fertilisers.

As part of the deal, Mr Sawiris, as Lafarge’s second-largest shareholder, will be appointed to the French group’s board, with a second representative to be named in due course.

Morgan Stanley, BNP Paribas and Calyon. However, Lafarge has been forced to pledge €1bn in disposals by 2009.