Will Lafarge’s India divestment plan get derailed again?

Mumbai: LafargeHolcim, the cement giant formed after the global merger of Lafarge SA and Holcim in 2014, has been attempting to comply with competition rules in India ahead of an amalgamation of their businesses for more than a year now.

After the firm’s first attempt to sell two cement units was delayed by rules which prevented the transfer of mines along with the sale of a cement asset, its second attempt to sell a larger chunk of assets too has hit a roadblock. This time, the challenge has come from rival firms questioning the process followed by the Competition Commission of India (CCI).

On 13 April, the Competition Appellate Tribunal (Compat) passed a stay order on the sale of 11 million tonnes of cement capacity held by Lafarge India Pvt. Ltd, following an appeal by Dalmia Cement (Bharat) Ltd on 5 April. The stay order effective up to the next hearing on 9 May came a day after LafargeHolcim received non-binding bids from interested firms for the 11 million tonne cement assets.

Through its appeal, Dalmia is essentially raising two issues. The first is procedural and questions whether the CCI followed due process in approving the second proposal from LafargeHolcim when an order approving the original divestment plan had already been passed. As part of its original plan, LafargeHolcim planned to divest 5 million tonnes of capacity, which the CCI had approved. A delay in the transfer of mines prompted LafargeHolcim to submit a revised proposal which involved the divestiture of the entire LafargeIndia capacity.

Law firm Luthra and Luthra, representing Dalmia, is questioning this.

“CCI has no jurisdiction to approve a new approval after a final order approving a combination subject to modifications has been passed under Section 31 of the Act,” said Luthra and Luthra in a statement on 13 April.

An email query sent to Dalmia Cement on Thursday remained unanswered.

The second point of debate is whether conditions applied by CCI at the time of the first divestment plan are applicable to the revised proposal. In particular, as part of the first divestment order, the CCI said that no firm which has more than a 5% market share in the relevant market can bid for Lafarge India’s plants in Chattisgarh and Jharkhand, which were the units put up for sale in the first round.

The 5% market share consideration was retained by CCI in the second divestment, which ruled out some potential bidders, including private equity firm KKR who have had investments in firms competing with Lafarge India.

In a communication sent to private equity firm KKR, CCI refused the firm permission to bid for Lafarge assets, two people directly involved in the matter said. This was because KKR had a holding in Dalmia Cement. In January 2016, KKR exited from its 15% holding in Dalmia Cement and became a 8.5% equity stake holder in the parent company Dalmia Bharat Ltd.

A spokesperson for KKR refused to comment.

What’s at stake?

Lafarge India through its brand Concreto enjoys a premium over other cement brands including that of Dalmia in the eastern region.

According to a large cement stockist who did not wish to be identified, at present Lafarge brands sell for Rs.335-340 per bag of 50 kg against Dalmia Cement which sells in a range of Rs.310-315. Other key cement manufacturers like UltraTech Cement Ltd, ACC Ltd and Ambuja Cements Ltd sel for Rs.315-330 per bag in this region.

The new buyer of Lafarge’s India assets will have the opportunity to leverage the strong brand and expand quickly in the market. That’s one reason that the sale of Lafarge India’s assets has attracted a number of strategic buyers along with financial investors.

JSW Cement, Ramco Cement Ltd and Ireland’s CRH Plc are among the strategic bidders. If one of these were to bag Lafarge India’s assets, existing firms like Dalmia which compete with the Concreto brand could stand to lose.

“It has to be Concreto which concerns Dalmia; I see no other reason for the objection,” said a cement analyst from a foreign brokerage firm who did not wish to be identified.

So will Lafarge’s attempts to divest assets be derailed again?

“I don’t think this case will put the deal in jeopardy as the arguments to get the order was purely technical. Earlier, Lafarge tried selling its assets and has been unsuccessful due to mining regulations; thus, in the spirit of the deal, it is quite fair,” said Deepak Ladha, head-India for Global M&A Partners.

Ladha added that from an asset quality and financial performance point of view, Lafarge India assets are the best ones available for buyers.

“Even though smaller cement assets are expected to come on block, none meets the standard of this asset which makes it a highly contested deal,”