According to Bloomberg, Lafarge Holcim is considering the sale of its Indonesian subsidiary, Holcim Indonesia (SMCB) for US$2 billion. This follows Lafarge Holcim’s decision to shed 3.8 billion Swiss francs ($4.1 billion) in assets in March, with two-thirds of the impairments concentrated in Algeria, Malaysia, Iraq, Brazil, Indonesia and Egypt.

With 15 metric tons of total capacity it owns, Lafarge Holcim’s asking price implies an enterprise value per ton (EV/t) of approximately $133 per ton, a 60 percent premium compared to what SMCB trades at present.

However, it is still at a 30 percent discount from the average investment cost of the new entrants, excluding Conch’s Manokwari plant in Papua.

We note that implied price-earnings ratio (PER) and EV to earnings before interest, taxes, depreciation and amortization (EBITDA) of the asking price is extremely high, as SMCB has booked losses even at the operating profit level in the first quarter of 2018. We believe the sale is still at the very early stages, and thus the value of transaction is still very fluid.

The group has appointed bankers to find buyers and facilitate the asset divestment plan. Given the major changes in asset ownership, we believe the divestment process will be subject to review and approval from the regulatory authorities and SMCB’s minority shareholders.

Who are the potential buyers? We believe the potential buyers could include: China’s major players, China National Building Material (CNBM) and Anhui Conch, and other global and regional players, such as CRH from Ireland, Siam City Cement and Siam Cement from Thailand, as well as Ultratech from India.

In 2015, CRH acquired more than 36 tons of disposed assets, mainly in Europe, Canada, Brazil and the Philippines, during the merger between Lafarge and Holcim for 6.5 billion euros (US$7.1 billion), which translated into implied EV/t and EV/EBITDA of approximately $200 per ton and 8.6 times respectively.

What are the implications? If SMCB gets acquired by a new player looking to enter Indonesia or Anhui Conch, we believe it may not bode well for the sector as they will be quite aggressive in both growing market share and raising utilization rate.

We also think Anhui Conch will find this opportunity attractive, given that they have difficulty in sourcing limestone in Java, although Anhui Conch has never engaged in inorganic expansion (via merger and acquisition) in the past.

Furthermore, we believe either Indocement (INTP) or Semen Indonesia (SMGR) will have to step up to bid if Anhui Conch sets its target on SMCB. Among the two, we believe INTP will have a greater urgency and financial capability to acquire SMCB. The likely winner is the player that does not spend the money on the asset and enjoys the recovery, after the consolidation.

We have illustrated how the competitive landscape will change once the consolidation takes place through the Herfindahl-Hirschman Index (HHI) in Exhibit 1.

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The writer is a senior research analyst at Bahana Sekuritas.

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