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The CFO of HeidelbergCement discusses the German building-materials firm's recent takeover of Hanson and assesses the outlook for capital markets following the subprime meltdown.
Tim Burke, CFO Europe Magazine
February 4, 2008
Cement alone isn't enough to make a building. Aggregates such as sand, natural gravel and crushed stone are also needed to bulk out and strengthen the concrete. Likewise for HeidelbergCement, a German building-materials group, which invested heavily during the past year to ensure that it has the right mix for its business.
With a history dating back to the city of Heidelberg's first cement plant in 1873, the firm's business was solely domestic until the late 1970s when it invested in French cement company Vicat and bought Lehigh Cement in the US. In the subsequent years, it expanded across Europe, Africa and Asia. But it was only in 2006 that its board decided cement was no longer enough for the €9 billion group.
"We were based purely on cement, standing on one leg," recalls Lorenz Näger, the Frankfurt-listed group's CFO since October 2004. "We came to the conclusion that that's not sufficient in mature markets and that we needed a second, raw-materials business line to round up our strategic position in many countries, especially the UK and North America."
That decision led to the May 2007 acquisition of Hanson, a public UK-based aggregates company formed ten years earlier from the break-up of an eponymous conglomerate. Heidelberg paid £8 billion (€11.8 billion) for the company in a deal backed with debt from Deutsche Bank and Royal Bank of Scotland. In the following months, the group sold several non-core assets — including its stake in Vicat — to help refinance the takeover.
Näger says the integration and refinancing are running according to plan, and the group expects to report operating income of €1.8 billion for 2007, up from €1.3 billion a year before and including about €200m from Hanson. Nonetheless, ratings agency Fitch changed its outlook for HeidelbergCement to negative from stable in late January, arguing that uncertainties in global credit markets may make it difficult for the group to use further disposals in refinancing the acquisition cost.
HeidelbergCement responded by reiterating its commitment to de-leveraging and stabilising its investment grade ratings. Shortly before these events, Näger discussed the Hanson acquisition, integration and market outlook with CFO Europe.
You completed the Hanson takeover in August last year. How has the business been integrated?
Our ambition was to have a blueprint of the future organisation 100 days after closing. We split the integration team into countries and segments: operational excellence, meaning improving day-to-day operations; market synergies; and administration and other central functions. My involvement was mainly in shared service centres and IT, where we have big challenges to reduce the number of systems and bring together accounting, payroll, treasury, risk management and other functions.
Now the planning is done, and the challenge is to implement it.
During a busy year for the company, what aspects did you find most challenging as CFO?
The biggest challenge is going through every project's decision-making process a second time and repositioning each one. It's a leadership challenge to motivate people and redirect their ambitions, while breaking the group vision into detailed decisions. There's the overall picture of going from a single-product company to a two-product company — processes that were right yesterday may need to be changed for the future. But what is the impact on the IT department? What is the impact in the shared service centre? And so on.
How have you refinanced the cost of the deal?
Initially the financing was around €16 billion. That covered the purchase price and all debt that might need to be refinanced, although it turned out that we could continue with a lot of the debt that we took over in the company. We disposed of non-core assets, such as our 35% stake in Vicat, which we placed in a quasi-IPO. Then we sold Maxit, our dry-mortar company [to France's Saint Gobain] for €2.2 billion. Those deals gave us proceeds of about €3.6 billion. We announced a €500m capital increase with our shareholders and a bond of about €500m.
When the cash from Maxit is in, the outstanding acquisition debt will be between €7.5 billion and €8 billion. We're looking to see if we have other non-core assets we can sell and we may take further decisions at the end of the first quarter. There are businesses in Hanson that we don't know in detail — the brick business, for example — and we'll see if that's an asset that can be disposed of.
So as the integration nears its end, what's the outlook for the markets you operate in?
We had a relatively weak year in 2007 in Germany due to an increase in sales tax and the government's decision to scrap subsidies for building single-family houses in 2006, which caused a boom that year and a reduction in 2007. But we expect that the markets will pick up in 2008. The other candidate for lower growth is North America. We see a downturn in the US in volumes, balanced out to a certain extent by increasing prices.
We think that in 2008 we'll increase turnover again beyond the consolidation effect of Hanson. The cement business and the Hanson results on top should have a positive effect on turnover, cash flow and profitability.
How important are emerging markets to the group?
The strategy is to focus on cement in growing markets and cement and aggregates in mature markets. We're present in a number of growing and emerging markets — India, China and Indonesia in Asia, Kazakhstan and Romania in Europe, and Africa. We continue to invest — we are building a new kiln line in Tanzania and two new lines in China.... I think we've reached quite a good balance between mature markets and emerging markets and as soon as we've digested the Hanson acquisition we'll have a stronger focus on emerging markets.
How have different currencies affected the balance sheet?
Our assets are split over 25 different currencies. Our functional currency is the euro but only about 10% of our assets are in euros. In the past, the euro has significantly strengthened and this has led to some translational differences. We don't hedge those because the production structure in building materials is such that you always produce in those places where you have your cash flow. That's quite different from a traditional manufacturer, which might have a low number of production sites and then distribute and sell goods in all countries. They are much more exposed to fluctuations in currencies.
We have relatively high exposure in US dollars — about 20% of our assets and 20% of operating income — and there we have corresponding debt to a certain extent. We watch this carefully but it's not a critical issue in our industry.
Are there any uncertainties?
The US market is a concern, as is the value of the dollar, because then we have risks in the freight rates — we have about 10m tonnes of import and export business and the freight rates for ships are important. Fuel prices are also a concern. But these are typical business risks. Five years ago the US was down and Europe was up. Then the US was strong and now it's weaker again. That's the normal up and down of economies.