HeidelbergCement’s Lorenz Näger

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.

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.


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