LafargeHolcim Indonesia Prize Has Cement Shoes

(Bloomberg Opinion) -- As the world’s largest cement maker sheds assets, billionaires and industrial conglomerates are lining up for LafargeHolcim Ltd.’s $2 billion-worth of Indonesian kilns. A domestic buyer may be the best (only?) option.

The Swiss-based company’s sale of its domestic unit, of which it owns a bit more than 80 percent, is drawing interest from Japan’s Taiheiyo Cement Corp., the Malaysian tycoon Francis Yeoh, the biggest Indonesian cement maker PT Semen Indonesia, and the local subsidiary of Germany’s HeidelbergCement AG, Bloomberg News reported last week.

As the month-end deadline for first-round offers draws near, shares of the unit, PT Holcim Indonesia Tbk, have soared — up almost 40 percent in the last two trading days.

LafargeHolcim Indonesia Prize Has Cement Shoes

It’s easy to see why an exit would help unshackle the Swiss company. Born in a $40 billion-plus merger three years ago, LafargeHolcim has been open about slimming down as its performance faltered. Last year, it took 3.6 billion Swiss francs ($3.6 billion) of impairment charges. Indonesia, where it has capacity for almost 15 million tons of cement a year, was on the list of causes: The parent cited risks including doubts about the government’s ability to fund big projects. It also took a 205 million-franc goodwill charge in Indonesia; is battling the tax authorities there; and has land disputes with villagers on its hands, according to local news reports.

Interest in Holcim Indonesia may seem natural: A market in Southeast Asia’s biggest economy with high — and rising — volumes and a government keen on infrastructure seems like the stuff of concrete dreams. Alas, it’s not that simple: Pricing pressure is too great to turn top-line growth into meaningful earnings. Despite double-digit sales growth at home and in export markets, margins have hit rock-bottom.

The market, one of the world’s largest, is notoriously tough. Holcim Indonesia is the third-largest player with a 15 percent share. PT Indocement and Semen Indonesia split 60 percent, and the balance is held by many smaller companies. Holcim’s costs have risen to 80 percent of sales, much higher than peers, and it’s been running at a loss for eight straight quarters, which widened in the first quarter to the biggest since at least late 2015.

LafargeHolcim Indonesia Prize Has Cement Shoes

In the current conditions, it’s almost impossible “for new/Tier-2 players to survive,” Deutsche Bank analysts said, absent a significant increase in capacity utilization or a 40 percent jump in prices. The bank’s analysts stress-tested smaller players and reckoned that new entrants wouldn’t even be able to cover interest costs from a cement plant backed by debt, much less principal. They don’t expect the situation to improve soon.

Opportunities for a foreign buyer look slim. Japan’s Taiheiyo, for example, has hardly any presence in the Indonesian market and is struggling with surging costs at home, where it’s been unable to push through price increases. Navigating local taxes and land disputes would be no picnic, either.

A big domestic buyer, on the other hand, could force consolidation in the industry and unleash the oligopolistic forces needed to boost prices. Ultratech Cement Ltd., which has acquired smaller cement assets in India, may offer lessons on consolidation: It has built up volume and pushed through modest price increases.

Would-be acquirers of Holcim shouldn’t rely on President Joko Widodo’s infrastructure splurge. Questions remain about funding for hundreds of billions of dollars of projects, and state-backed companies are burdened by ballooning debt. 

A $2 billion sale implies a valuation of a little over $130 per ton of cement on the basis of enterprise value to capacity, or broadly how much it costs to set up plants with a similar capacity, according to the Deutsche Bank analysts. That gives Holcim a 10 percent to 40 percent premium over the value of the biggest Indonesian cement companies on that basis.

For foreign buyers, that’s expensive cement.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

©2018 Bloomberg L.P.