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Lafarge, Holderbank, Cemex in race for L&T cement unit

Three of the world's largest cement companies have been shortlisted as potential buyers of a stake in India's largest cement producer, Larsen & Toubro Ltd, a source involved in the bidding process said.

The three are Lafarge SA of France, the world's No 1 producer, Switzerland's Holderbank and Cemex CPO of Mexico.

The three companies are conducting due diligence by examining L&Ts financial records and inspecting its cement plants prior to submitting actual bids, the source added. The winner is expected to be decided within the next two months.

An L&T spokesman denied that a deadline had been set, and would not comment on whether the list of partnership candidates had been whittled down to just three.

"Given the size and complexity of the transaction, it will be difficult to set a time frame," the company spokesman said without elaborating.

Bombay-based L&T decided last year to spin off its poorly-performing cement unit into a new company, and to sell a 25 per cent stake in it to a strategic partner.

Major global giants like Italcementi, Italy's biggest producer, and top Indian companies like Grasim Industries Ltd had expressed interest. But those companies are not included in the final list of candidates, the source said.

Analysts reckon that L&T would fetch a price of over $100 per tonne, putting a value of around $2 billion on its cement business as a whole.

Excluding debt, the cement business is estimated to be worth $1-$1.2 billion, meaning a buyer would have to fork out $250-$300 million for a 25 per cent stake.

By contrast, Lafarge's recent buyout of two cement plants of Raymond Ltd and Tata Iron and Steel Company Ltd were struck at $75-$80 per tonne or a combined cost of $277 million.

KEEN TUSSLE

All three of the shortlisted companies are looking to expand aggressively in emerging markets, where growth rates are higher than in developed economies.

Indian cement demand grew by its highest ever rate of 15 per cent in 1999/00, reflecting a sharp rise in housing construction that year. Though demand fell the following year, analysts are bullish about prospects considering the need for housing and basic infrastructure in a country with a population of over a billion.

Cemex, in association with the American International Group (AIG), has a fund in place for Asian acquisitions, while a stake in L&T would greatly boost Holderbank's bid to regain its place as the world's No 1 producer.

The Swiss giant was unseated from that position in January when Lafarge bought Britain's Blue Circle Industries in a 6.5 billion euro deal.

THE PRIZE?

The Indian cement market is the world's second-largest after China. In 1999-00, Indian companies produced 94 million tonnes of cement against demand for 92 million tonnes.

Larsen & Toubro is the largest Indian cement producer with 15 million tonnes of capacity, and plans to add another one million tonnes by year-end.

That could worsen the problem of industry over-capacity, which drove most major Indian cement makers into the red in the first half of the past year.

The top four producers -- L&T, Grasim Industries, ACC Ltd and Gujarat Ambuja Cements -- are at various stages of adding more than 11 million tonnes of capacity. A fifth, Jaiprakash Industries, reportedly plans to build a new 2 million tonne plant.

All told that will expand industry capacity, which now totals 113 million tonnes a year, by 13 million tonnes or 11.5 per cent.

Yet supply already exceeds demand, and the Indian economy is slowing. All cement makers could suffer if the added capacity triggers aggressive price cutting of the sort that drove many producers into the red until late last year.

In November, the big cement makers cut production to drive up prices, which subsequently rose 35 per cent, restoring profitability and boosting share prices.

For the January-March quarter, L&T is expected to report profit more than quadrupled from the previous three months to Rs 1.55 billion, on sales that rose 31 per cent to Rs 25.4 billion, according to a Reuters poll of 12 brokerages.

For the year to March, though, profit is expected to fall 36 per cent, as the second-half recovery was unable to compensate fully for the first-half loss.

Besides cement, Larsen & Toubro has interests in engineering and construction businesses, electrical equipment and heavy machinery.

At Wednesday midday L&T's shares were up Rs 4.50 at Rs 216.20.

L&T shares are down 26.17 per cent from their calendar 2001 high of Rs 292.70 in February, and down 66.0 per cent from the record high of Rs 629.95 hit in January last year.

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