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Bafflement at Lafarge's riddle of the Egyptian sands

Thursday, Dec 13, 2007

This week's acquisition by Lafarge of Egypt's Orascom Cement has sent analysts and investors into ecstasy. Rarely do mergers provoke such purple prose in brokers' reports, with one describing it as a "beautiful deal".

But the French cement group should remember that just as the desert is beautiful, it also hides all sorts of dangers. With Orascom Cement, Lafarge has indeed acquired a most attractive and significant asset in Egyptian Cement Company , which controls 25 per cent of the country's fast-expanding cement market. In so doing, however, it also seems to put the French group in an odd situation.

For ECC is 44 per cent owned by Switzerland's Holcim, one of the French group's main international rivals. No doubt due diligence before the deal has established that Holcim can do little to stop the change in control. If so, then why has Lafarge been so low-key about the fact that its principal competitor will become a key partner in Egypt?

The French company did answer analysts' questions about Holcim's big minority stake in ECC but it certainly did not volunteer the information.

The situation at the very least is ambiguous. The Swiss are saying they are baffled and have no intention of selling their Egyptian stake.

Indeed, Lafarge's acquisition may make the Swiss more determined than ever to stay, for if they cannot stop the deal they can at least make everyday life more difficult. It also seems to give them a unique opportunity to watch over how their main rival works and integrates a significant acquisition.

Of course, Holcim would have to be careful about exploiting the situation because this could affect the value of its own holding in Egyptian Cement Company . Yet even in the cosy world of cement manufacturing, it is not a comfortable position for Lafarge. Investors may well be praising the French group for its Orascom deal but it has not come cheap.

Egypt's Sawaris family, presumably, must also have approached Holcim over the sale of their cement business, given that they have been such close partners since the mid-1990s.

If the Swiss decided to pass because they felt the price was too high, then the pressure must be all the greater on Lafarge to make the deal live up to its lofty expectations.

The fact the French are coming into the Egyptian cement partnership with a far higher valuation suggests they will want to drive their investment much harder than, arguably, their new Swiss partners and old foes.

After all, the Swiss, who invested in this business at a much lower price a decade or so ago, can afford to sit back and take a more leisurely ride than Lafarge.

Lufthansa's gambit

Lufthansa must be pleased to have flown out of the Alitalia hornets' nest last week and left the field clear to its archrival Air France-KLM to bid for control of the beleaguered Italian flag carrier.

With the Germans out of the way, the French probably felt they had the deal in the bag. After all, they believed they had the support of Romano Prodi, the prime minister, whose government has been trying desperately to sell its 49.9 per cent in the lossmaking airline. Alitalia management has backed the French proposal, and Giovanni Bisignani, the head of the International Air Transport Association and a former Alitalia chief executive, yesterday also suggested it was a good solution.

But Air France clearly underestimated its only other remaining rival: Air One, the far smaller independent Italian airline. In terms of public relations and political lobbying, Air One's Carlo Toto has been doing a remarkable job during the past few days.

He has managed to whip up a frenzy of nationalistic support for his Italian rescue of Alitalia - enlisting the backing of Luca di Montezemolo, head of the country's employers' confederation; Silvio Berlusconi, former prime minister and media mogul; and the president of Lombardy, to name just three local celebrities. Better still, he has secured strong financial firepower with the backing of such heavyweights as Italy's largest bank Intesa, Nomura, Morgan Stanley and Goldman Sachs.

The government and the company's board are due to decide the fate of the airline in the next 24 hours. Rome is clearly in a bind. But should it opt in the end for an Italian solution - as Spain recently did over its flag carrier Iberia - the Germans could be tempted to open a bottle or two of Chianti to celebrate.

Remember that Lufthansa and Air One have had a commercial code-sharing partnership for seven years. When the time comes for Mr Toto to find a strong international ally for Alitalia, where will he turn? Lufthansa would probably be a pretty good bet.

european.view@ft.com

By PAUL BETTS

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