Canada’s construction industry faces a major shakeup in the wake of the proposed merger of cement makers Holcim Ltd. and Lafarge SA as the country’s competition watchdog eyes forced asset sales that could attract significant interest from bidders.
Roughly half of the country’s cement market is now held by the two companies, a potentially unpalatable market concentration in the eyes of the federal Competition Bureau should the European building material producers succeed in their merger.
Industry officials expect that by year’s end, the regulator will order the combined company to divest a sizable number of assets in Canada — perhaps even Holcim or Lafarge’s entire operation in Eastern Canada.
“There is absolutely no way Ottawa is going to allow Lafarge and Holcim to keep those assets,” a person close to Lafarge said Monday, noting the companies have one cement plant each in Ontario and Quebec as well as separate construction aggregate and ready-mix operations.
Possible buyers include private equity firms such as New York-based Blackstone Group, which last month hired an Onex Corp. investment specialist to help it hunt for opportunities in Canada. Blackstone is already present in the sector through its Denver-based holding Summit Materials.
Existing industry players like Mexico-based Cemex and German-headquartered HeidlebergCement AG would also likely express interest, though it’s unclear how much current financial firepower they have to pull off a big transaction. Almost all the world’s cement players have been retrenching after the credit crisis and global recession peeled away demand for building materials, forcing some companies to run their operations at a loss and leaving others over-leveraged from previous acquisitions.
Lafarge and Holcim’s combined Canadian operations generate $750-million to $800-million in annual earnings before interest, taxes, depreciation and amortization, according to one industry insider who asked not to be named. “Cash generation of that magnitude is certain to attract long-term investors,” the person said.
Jona, Switzerland-based Holcim and Paris-based Lafarge announced last month plans to merge their operations in a mega deal that would create a new producer with annual revenue topping US$40-billion. Management of the two companies said at the time they believed they would be required to sell assets representing 18% of that revenue to satisfy competition regulators in various countries.
Together Holcim and Lafarge employ about 9,000 people in Canada.
Whoever buys the divested Canadian assets will likely keep the cement plants operating with existing staff, investing as needed to upgrade the facilities. The business represents a tremendous money-making opportunity in a market that nevertheless remains challenging.
A December 2013 study on the cement market by independent economist Colin Sutherland concluded that Quebec currently has about 1.2 million tons per year of unused capacity while eastern Pennsylvania and New York has about 0.6 million tons.
That means many plants are operating well below maximum output.
Plans by Quebec’s well-known Bombardier-Beaudoin family to launch a $1-billion cement plant in the chronically underemployed Gaspé region have thrown the industry for a loop, generating a swarm of criticism from competitors and lawmakers in both Canada and the United States.
The family’s McInnis Cement unveiled plans this year for a new factory in Port-Daniel-Gascons that would produce 2.2 million tons of cement per year, largely for export by ship to the United States.
The project, championed unequivocally by the opposition Parti Québécois, is being billed as a saviour for the region because it will support 1,500 construction jobs and work for 200 permanent plant employees.
“This is a historic project, a project that brings with it an extraordinary collective hope,” Sylvain Roy, the PQ National Assembly member for the Gaspé’s Bonaventure riding, told reporters last week.
Under former financial minister Nicolas Marceau, the PQ committed $350-million of public money to the plant and adjoining marine terminal, notably via a $100-million equity investment and $250-million loan.
Quebec’s newly elected Liberal government, facing a $3.1-billion budgetary deficit this fiscal year, is cool to the project. It is reviewing its spending commitments in the matter, knowing full well that there could be a political backlash if it decides to reneg on the previous government’s pledge.
At the same time, there is also uncertainty about efforts to raise the balance of the project cost through private financing.
National Bank is said to be leading an effort to find lenders for the project but is facing concern over market saturation.
Meanwhile, appeals for federal money appear to have fallen flat. According to sources, Business Development Bank of Canada has ended its earlier involvement while Export Development Canada was approached but declined to commit any funds.
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