Lafarge announced on Monday heralds more consolidation in the domestic cement market, providing the top firms with greater pricing power.
The transaction, which is likely to be completed by the first half of 2015, will result in restructuring of the two companies operations and divestment of assets across major geographies including India.
In its presentation, Holcim highlighted that it will engage in selected divestments and portfolio optimisation in anticipation of regulatory requirements worldwide.
The merged entity will become the market leader with an installed capacity of 69.6 million tonnes (mt) and market share of nearly 19.88%, overtaking UltraTech Cements 59 mt installed capacity.
Experts believe the merger will not disrupt industry dynamics much, except in the eastern region where the combined entity would command nearly 43% market share.
Holcim Group, through its subsidiaries ACC and Ambuja Cements, has well diversified presence across all the regions in India, but Lafarge has been a leader in the eastern region with brands like Concreto and Duraguard. Lafarge currently commands a market share of over 20% in its relevant markets in east and central India, while Holcim, through its two Indian subsidiaries, too commands nearly 22-23% market share in the east.
The higher market share in east may invite close scrutiny by Competition Commission of India if the company does not divest some of its capacities going forward, said Nitin Gupta, a partner and leader (cement practice) at EY.
Nevertheless, the combined entity would lead to lower competitive intensity and improve the pricing power and operating metrics for all players, say experts.
For the two global cement majors, it would result in substantial synergy benefits and will help improve their balance sheets which currently are not in good shape. However, from the India point of view, it will help in bringing about significant synergies to ACC-Ambuja and Lafarge if they decide to have common brand names. It will also be good for overall industry pricing discipline, said an analyst at foreign brokerage house, not willing to be quoted.
The domestic cement industry is currently witnessing capacity utilisation of less than 70% on account of large capacities and lower demand due to subdued economic growth.