Lafarge acquisition: stoking competition?

The news of Lafarge’s acquisition, which has made Bestway Cement the largest cement manufacturer in the country, has now given way to news of further expansion by competitors. Reportedly, DGKC, which was among the two short-listed parties for the acquisition, might reconsider expansion plans, this time in the Southern region.
The acquisition has cost Bestway an amount of USD 218 million (an enterprise value of USD 329 million), at per share price of Rs19.71. This implies an 18 percent premium to current market price, while currently Lafarge’s P/E stands at 11.63. This compares with a P/E of 12.68, 7.77, and 5.44 for LUCK, DGKC and MLCF, respectively.
Lafarge has also improved its financials over the years, evident from increased profitability and an increasingly secure position in terms of fixed assets and long-term debt.
Net margins took a positive turn in 2012 and have since been increasing.
Similarly, the fixed asset turnover ratio has been on a rise, implying improved utilization of plant, property and equipment.
At the same time, there has been a decline in long-term debt along with a corresponding increase in total assets. Over time, this implies lesser dependency on debt for business growth.
Seems like a good move by Bestway; doesn’t it? But, does it really put the leading competitors, Lucky and DGKC at risk? Not so much. Both the companies remain financially secure, with Lucky holding no long-term debt at all. Per ton metrics shows that DGKC’s long-term debt still remains lower than Bestway’s, even after the latter’s acquisition of Lafarge.
Similarly, DGKC has almost twice as much in terms of total assets per ton than either of the competitors.
Lucky is also to pursue what one may call greener pastures abroad with its plans to establish a plant in Africa, taking a good chunk of the sector’s exports. However, back in 2007, when DGKC had last pursued plant expansion, long-term debt per tonne stood at a little over Rs2,000. For Bestway, this figure is much lower at Rs729.
In the same vein, the acquisition is unlikely to initiate an immediate price war even if further expansion is pursued. Industrial reports suggest that prices are likely to remain stable until additional capacities become operational, while strong demand in the sector may also postpone the likelihood of a price-war. By and large, the sector’s appetite rests on strong demand driven from mega projects that the PML-N government is known to have a knack for.