French Parent Targets Huge but Little-Known Lafarge North America

By Jerry Knight
Monday, February 13, 2006

The Washington area is preparing to bid a raucous au revoir to one of its biggest but least-known corporations -- one that arguably never should have existed.

Lafarge North America Inc., a giant cement maker based in Herndon, is considering a $3 billion buyout offer from the French parent that already owns 53 percent of its stock.

The local Lafarge is the biggest cement producer in North America. It is this continent's outpost of Lafarge SA, the biggest cement company in the world.

Lafarge North America was formed after the French company methodically rolled up more than a dozen cement makers in Canada and the United States and sold a minority interest to the public.

None of Lafarge's hundreds of production and distribution facilities are anywhere near Washington, but the headquarters is near Dulles International Airport -- for quick connections to the far-flung operations and to the home office in Paris.

Herndon, however, is a long way from Wall Street.

Not a single New York investment analyst follows Lafarge, even though the company has a stock market value of more than $6 billion and is the powerhouse in its business.

Lafarge was a major missed opportunity for Wall Street. The stock gave investors a 46 percent return over the past year -- including a 28 percent jump since the buyout bid was announced a week ago today.

The shares traded for $64.25 before the announcement and closed Friday at $82.

That's an extraordinary price, considering that the French Lafarge has offered to pay only $75 a share.

Wall Street may have overlooked Lafarge as a long-term investment, but it's not ignoring the possibility of making a quick buck on the buyout.

Speculators clearly think the $75 bid is too low -- even though it is 17 percent more than the pre-offer price and about 30 percent more than the stock has traded for over the past three months.

"Too low" is also the gripe of the legal opportunists who make their living by suing companies on behalf of shareholders. It took the class-action lawyers only one day to find an aggrieved investor and file a lawsuit. As of Friday there were at least five of them.

The lawsuits are a sideshow to what is likely to be a costly fight over how much the French Lafarge will have to pay to buy out the minority shareholders in Lafarge North America.

Dundee Securities Corp., one of the Canadian firms that follows Lafarge, estimated that the stock ought to be worth $89.40 a share. That valuation is based on what other cement companies have sold for recently.

Another Canadian analyst, Stephen Laciak of National Bank Financial Inc., said it's "a stretch" to think the company will bring that much, but "$85 is not implausible."

Nobody challenges the wisdom of Lafarge SA buying out the public shareholders in its North American offspring.

"It's made sense for the parent to do this for the last 10 years," Laciak said in a telephone interview from Montreal. Consolidating ownership would increase the profit of the French company, even after accounting for the multibillion-dollar buyback cost, he said.

The original reason for keeping Lafarge's North American operations in a separate, publicly traded company was that it provided a way to raise capital on Wall Street.

Regardless of their size or success, it's difficult for foreign companies to sell stock in the United States, the world's biggest, richest market. Stocks of many foreign companies trade here, but it's difficult for overseas firms to meet the accounting and regulatory requirements to sell stock on Wall Street.

Selling shares in a U.S. subsidiary structured to meet those requirements is much less of a hassle. Lafarge North America sold stock twice, in the 1980s and 1990s.

But the days when Lafarge needed to raise capital in the United States are long gone. The French company has plenty of money -- enough that it could have bought back the minority shares in its North American operations at any time in the past decade and a half.

In fact, any time in the past decade would have been better than now because the stock was at near-record levels even before the buyout offer. It was a few bucks higher for a few weeks last summer, but buying now basically means paying top dollar.

The stock is doing so well because Lafarge's business in North America is roaring, thanks to the housing boom and huge federal highway construction programs. Demand for cement is so strong that Lafarge was able to raise prices 10 percent last year, and that's a big increase in a commodity business.

Lafarge is also in the wallboard business, and it's doing even better there. U.S. plants can barely keep with the demand from builders, allowing Lafarge to raise wallboard prices 24 percent last year. Overall, sales last year rose 15 percent to $4.3 billion.

The peak of a cycle like that is not the ideal time to buy out minority shareholders. It would be cheaper to pick them off during a slump.

But the timing seems to be driven by a change of command in Paris. A new chief executive, Bruno Lafont, took over Jan. 1 and rapidly set about streamlining the company. Lafarge North America is one of several operations in which the parent company has minority partners. That structure once was popular with European managers, but they are rapidly adopting the American strategy of consolidated ownership.

The buyout bid put Lafarge managers in Herndon in an awkward position. They would not comment for this column. A formal offer to Lafarge shareholders detailing the buyout offer is expected in a couple of weeks.

Ordinarily in takeovers, the goal of management is to get the best possible price for shareholders. But motivations can change when the bidder is "family."

To deal with the potential conflicts of interest, Lafarge last week set up committee of outside directors to evaluate the offer. They hired investment bankers to advise them.

Usually it's a foregone conclusion that such an independent committee and its bankers will spend several million dollars, keep a lot of young MBAs up late at night crunching numbers and then issue a report determining that the offer is indeed fair and adequate.

Donning that fig leaf may be difficult in this case. The lawsuits, though utterly predictable, put on some pressure. The heat is turned up further by the analysts who declared the $75 offer too low and by the speculators who bid up Lafarge's stock price to $7 a share more than the French offer.

Regardless of the $85 or $90 targets set by analysts, buying Lafarge stock at this point is a game being played by only professional takeover analysts. The stock stabilized after jumping almost $18 a share last Monday.

That leap looked like a selling opportunity to many long term Lafarge investors who took the money, said " merci beaucoup , Monsieur Lafont" and bid au revoir to Lafarge.

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