Debt may deter Cemex as Lafarge, Holcim asset sale looms

Tue Apr 8, 2014 2:00am EDT

By Gabriela Lopez and Gabriel Stargardter
    MONTERREY/MEXICO CITY, April 8 (Reuters) - The merger
between Switzerland's Holcim and France's Lafarge presents
Mexican cement firm Cemex with a golden opportunity to snap up
divested assets, but a heavy debt load means it is unlikely to
make any big buys soon.
    One of the world's biggest cement companies, Cemex went on a
massive, poorly timed shopping spree just before the last
financial crisis. It shelled out $16 billion to buy Australian
peer Rinker, leaving it neck-deep in debt and poorly positioned
when the U.S. housing market collapsed.
    Cemex came close to defaulting and its share
price plunged before it went through painful refinancings that
have put it back on its feet but capped its spending.
    That cap could now be a strait-jacket preventing Cemex from
spending big as Holcim and Lafarge look to sell off 5 billion
euros ($6.85 billion) in assets in order to win approval for a
merger that would create the world's biggest cement company. 
    "We don't see Cemex being able to buy something. Its level
of leverage is something that blocks it," said Fernando Bolanos,
an analyst at Mexican brokerage Monex. "Nor do we see it as a
buy-out target."
    Cemex had $16.3 billion in net debt at the end of 2013 and a
ratio of net debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) of 6.2, well above the
industry average, as well as limited cash flow.
 
    Under a 2012 debt refinancing covenant, Cemex must use cash
flow to pay down debt, restricting what it can buy.
    High debt leverage means Cemex's credit ratings lie four
levels below investment grade, which it hopes to regain in 2016.
    However, the fact that Holcim and Lafarge will be forced to
sell assets could apply downward pressure on asset prices,
giving Cemex a shot at smaller purchases helping it to grow in
slowly-improving foreign markets.
    Cemex shares surged last Friday on the news that Holcim and
Lafarge were in advanced merger talks as investors bet that
industry consolidation would help underpin cement prices, but
they fell 2.33 percent on Monday to 17.22 pesos.
    Cemex executives have not yet commented on the merger deal
between the two European companies, which would create a giant
with a market value of close to $60 billion and $44 billion in
annual sales. 
    Industry experts said it would probably take two years for
the merger to gain global approval given that governments are
often major customers of cement companies as well as sector
regulators.
    A debt restructuring and a pickup in the U.S. construction
industry have helped improve Cemex's results, and its share
price, but the company is not expected to pay down much debt any
time soon.
    "Cemex's net debt is not projected to change materially in
the next two years despite the projected upturn in EBITDA due to
rising working capital needs associated with growth, increasing
capex, and higher taxes," rating agency Fitch said in a report
last month.
    Two-thirds of the divestments planned by LafargeHolcim are
expected to affect Western Europe, but the companies' operations
also overlap in Brazil, Canada, China and India, Lafarge Chief
Executive Officer Bruno Lafont said.    
    One consultant who has worked on Cemex debt refinancing
projects said he expected the company to look at assets in
Brazil and Canada, and to shy away from Asian markets.
    In the United States, where Cemex already has a strong
presence, it could use its stake in Mexico's Grupo Cementos de
Chihuahua as an investment vehicle to get around its spending
cap, the consultant said.
    Cemex's fourth-quarter loss narrowed to $255 million from
$494 million a year earlier as it hiked prices and cement sales
picked up in the United States and Europe. 
    However a sagging construction sector at home in Mexico,
which accounts for around a fifth of Cemex's total sales,
dragged Mexican net sales 6 percent lower during the quarter.
    Holcim and Cemex announced plans in August to exchange some
assets and combine others in Europe, seeking cost savings in
response to tough conditions in the construction sector. The
deal has already come under regulator scrutiny and its fate is
unclear. 
    Chief Executive Lorenzo Zambrano told a shareholder meeting
in March that Cemex is always on the lookout for opportunities.
    "We think there are some areas in Southeast Asia where we
could take part and some markets have been growing fast like
Philippines and Colombia, and we are investing there," he said. 

 (Additional reporting by Elinor Comlay; Writing by Simon
Gardner; Editing by Kieran Murray)