Holcim Ltd (ADR) (OTCMKTS:HCMLY) (VTX:HOLN), a holding company based in Switzerland engaged in manufacturing, distribution and marketing of building materials, is negotiating a merger with its French counterpart, Lafarge S.A. (ADR) (OTCMKTS:LFRGY) (EPA:LG), according to report from Bloomberg.

Holcim

Holcim – Lafarge merger talks confirmed

In a statement, the two largest manufacturers of building materials worldwide confirmed that they are exploring a merger of equals to build their “strengths and identities. According to Lafarge S.A. (ADR) (OTCMKTS:LFRGY) (EPA:LG), it has not reached any agreement with Holcim Ltd (ADR) (OTCMKTS:HCMLY) (VTX:HOLN), and it cannot assure that the discussion will lead to a definitive agreement.

Holcim Ltd (ADR) (OTCMKTS:HCMLY) (VTX:HOLN) and Lafarge S.A. (ADR) (OTCMKTS:LFRGY) (EPA:LG) increased their dominance in the cement industry through acquisitions. In 2008, the French cement manufacturer purchased Orascom Cement for 10.2 billion euros. The Swiss cement manufacturer bought Aggregate Industries for $4.1 billion in 2005.

Cost cutting measures

In an interview with Bloomberg, Ian Osburn, an analyst at Cantor Fitzgerald, noted that there is still a massive oversupply in the industry and that a merger will help the cement manufacturers‘ “cut a lot of costs and dominate a few more markets.”

“This is traditionally the time when you’d see M&A in these sectors in upswings, when profits and margins are improving,” added Osburn.

Bernard Fontana, the chief executive officer of Holcim Ltd (ADR) (OTCMKTS:HCMLY) (VTX:HOLN), implemented cost-cutting measures to improve the profitability of the company. He joined the company in 2012 and carried out a cost-cutting program similar to that which he implemented during his tenure at Aperam, a steel maker.

Last August, Holcim Ltd (ADR) (OTCMKTS:HCMLY) (VTX:HOLN) agreed to swap its assets in Germany and the Czech Republic with Cemex SAB de CV (ADR) (NYSE:CX) (BMV:CEMEXCPO), the largest cement manufacturer in the Americas, to improve its returns.

On the other hand, Bruno Lafont, CEO of Lafarge S.A. (ADR) (OTCMKTS:LFRGY) (EPA:LG), is also reducing the company’s expenditures, selling assets to improve its credit rating, and pushing sales of its higher-margin services.

Regulatory scrutiny

Osborne believed that a merger between the two largest cement manufacturers will face regulatory scrutiny. According to him, Holcim Ltd (ADR) (OTCMKTS:HCMLY) (VTX:HOLN) and Lafarge S.A. (ADR) (OTCMKTS:LFRGY) (EPA:LG) may need to sell assets in the United States and Europe to gain approval.