School of Advanced International Studies

Johns Hopkins University

GORDON BODNAR1

The Return of Lafarge

Lafarge S.A.’s Acquisition of BCI Ltd
Bertrand Collomb, chief executive of Lafarge, the French building materials group, has a
lot riding on successful bid negotiations with Rick Haythornthwaite, his opposite number
at Blue Circle Industries, the UK cement maker. As well as demonstrating that he has a
viable global strategy for his company, Mr. Collomb must show that the deal-making
skills he showed when acquiring Redland, in November 1997, have not deserted him.
Few people in the City doubted that Lafarge would return with a renewed offer. The
industrial logic of putting the two groups together remained strong and Mr. Collomb had
made no secret of his continuing interest.
Financial Times (London) 8 January 2001

Let's face it, Blue Circle 2--The Return of Lafarge is much less fun than the original.
There's no violence or bad language. And Rick Haythornthwaite, our plucky British
hero, has stopped lobbing lumps of concrete at Bertrand Collomb, the marauding Frog.
It's just so predictable. Against the odds, Mr. Haythornthwaite escaped the concrete
boots last May, seeing off the 450p a share bid, but there was always a deal waiting to
set. For the boys at Blue, Lafarge's 32pc stake threw a spanner in the mixer marked
expansion, while Lafarge had too much of its capital slopping about in a competitor…it
all comes down to price…
The Daily Telegraph (London) 9 January 2001

January 2001

They were right. As Bertrand Collomb tossed the newspapers onto his concrete desk, he
couldn't find fault in what was being reported. Collomb was frustrated that negotiation details
had been leaked again, an unpleasant echo of the way Lafarge's unsuccessful bid had begun a
year earlier. Yet, eager to maintain Lafarge as a leader in the consolidating global cement
industry, he was determined to press on.

Collomb was convinced Lafarge could complete the deal. The company had successfully
acquired British roof-tile maker, Redland, at the close of 1997. Also during 1997, Lafarge and
Blue Circle Industries (BCI) launched a joint venture cement trading company. In 1998 Lafarge
purchased Blue Circle’s South African operations (a transaction valued at more than US$ 300
million) and achieved improvements in production efficiencies in both the kiln (12%) and mill
(15%) operations. The joint venture and subsequent purchase of Blue Circle assets had given
Collomb ample opportunity to study BCI intimately. In the very marrow of his bones, he knew
what his rival was worth. And still, the first, hostile attempt had failed spectacularly, making
BCI CEO, Rick Haythornthwaite, something of a folk hero.

Researcher Susan Balc prepared this case under the supervision of Professor Gordon Bodnar. The case is intended to serve
as the basis for class discussion and is not intended to imply effective or ineffective management decisions or activities. All data
in the case are taken from public sources.

Cross-Border M&A: The Return of Lafarge 1

 Since the failure of the first bid, pressure had been building to get the deal done and at a
good price. Lafarge's fastest growing rival, Cemex, was aggressively acquiring global
production facilities bringing its installed annual capacity to within 8% of Lafarge's. Just one
more acquisition could put Cemex ahead of Lafarge in the race to acquire global capacity.
Exchange rates had changed significantly during the intervening seven months. Regulatory
issues in Europe, North America and Malaysia were all of concern. Most pressing was the
recovery in Asia. The currency and banking crisis had given Lafarge its initial opportunity.
Now, a strong recovery could put Blue Circle's assets out of reach. Collomb knew he couldn't
risk waiting until May to make a second hostile bid. The acquisition had to be now and it had to
be accomplished on friendly terms. Collomb called in his acquisition team to review the bid one
last time. The price had to be right.

Cement Industry

Concrete, a mixture of cement, aggregates and water, is the world's most common
building material. Hydraulic cement (cement that hardens when water is added) is the basic
binding agent in concrete. Of the 1.6 billion tons of annual worldwide cement production, about
60% takes place in Asia, 15% in Europe (ex-FSU2), 14% in the Americas with the remaining
production divided fairly evenly between FSU and Africa.3

Each type of cement is manufactured to meet specific physical and chemical

requirements. Manufacturing consists of three broad processes. The first is the raw milling, or
kiln feed preparation. This involves the crushing, grinding and
proportional blending of raw materials (limestone, or other Plant Costs
calcareous rock, with relatively small quantities of siliceous, Raw materials 13%
aluminous and ferrous materials, as required). The second step, Energy 31%
where the raw materials are fed into kilns, is the burning and Maintenance 12%
Labor 20%
calcining, otherwise know as clinkering. As the materials reach
Administration 9%
2700ºF a series of chemical reactions cause them to fuse together.
Depreciation 15%
The resulting intermediate product is a marble-sized gray-black
TOTAL 100%
pellet, clinker. After the clinker has cooled to handling temperature,
the third stage can begin. In the finish grinding process, clinker is ground with a small amount of
gypsum (about 5%) into a powder fine enough to pass through a 75-micron sieve. This powder
is the finished product, cement.

Demand for cement is a derived demand. The proximate driver of cement demand is the
demand for ready-mix and pre-cast concrete products, whose demand is derived in turn from the
overall demand for construction. Because of the derivative nature of the demand for cement, it is
very price inelastic. Pricing will reallocate market share, but generally, will not alter aggregate
demand. The majority of cement is consumed by three sectors in the construction industry,
infrastructure, commercial, and residential. Infrastructure is the most intensive consumer of
cement (for example: construction of a concrete highway can demand 700,000 tons of cement
per billion dollars of spending) while residential construction generates the least intensive

2Former Soviet Union

3van Oss, Hendrik G. Minerals Yearbook 2000, Volume 1, Metals and Minerals, Preliminary Release of the Annual Tables for
Cement. US Geological Survey. via www.minerals.usgs.gov

Cross-Border M&A: The Return of Lafarge 2

demand (150,000 tons per billion dollars of spending).4 The health of a domestic cement market
is in large measure dependent on a country’s general macroeconomic condition. Government
policies of particular concern to cement producers are those policies related to trade, interest
rates, infrastructure spending and environmental regulation.

The cement market operates in two distinct realms, local and global. In the local arena,
cement makers are protected by geography. Because of its low value to weight, cement cannot
be trucked great distances over land; about 200 km is the maximum distance economically
feasible. This area is referred to as the producer’s natural market. It is common, where the
producer’s market is determined by geography rather than market competition, to find most
cement assets owned by domestic operators. These local operators are generally small by global
standards.

Despite the physical limitations of overland transport, the cement market operates in the
global arena as well. Large cement companies facing stagnant markets in their home countries
began to purchase assets in developing countries where growth rates often reach double digits.
These companies have since been able to exploit improving technologies (information,
production and shipping) to optimize what have become their global networks. Where producers
have access to ocean transport facilities, excess production can be economically transported to
network areas experiencing shortages.

Global consolidation began in earnest during the middle 1980s when the major European
producers were “faced with stagnating markets at home but enjoying excess cash flow.” 5 The
enviable excess cash flow in Europe coincided with a destabilizing flood of cheap Latin
American cement washing into the US. Suddenly uncompetitive, many US producers sold their
facilities to the eager shoppers, thus exiting the industry all together. A second round of global
consolidation came in conjunction with the collapse of the Soviet block in the early 1990s.
Again, the buyers were major Western European producers. This time the targets were facilities
in Eastern Europe. The Southeast Asian Crisis set the stage for a third round, where the major
multinationals emerged with stakes in about 65% of SE Asia’s productive cement capacity.

The Target: Blue Circle Industries, Plc.

Since its earliest days, Blue Circle has been party to consolidation and global expansion.
The improved efficiency of the rotary kiln, introduced in 1900, spurred consolidation in SE
England, where several producers came together to form Associated Portland Cement
Manufacturers Ltd., Blue Circle’s earliest incarnation. The Company began several decades of
global expansion in 1920, first entering markets in South Africa, Mexico and Canada and
subsequently moving into Australia, New Zealand, Malaysia, Nigeria, Kenya, Tanzania,
Rhodesia, Spain, Brazil, Chile and Indonesia. At the time of World War II, Blue Circle was the
world’s largest cement company.

4 Commercial usage is estimated at 200,000 tons per billion dollars of spending. These are general estimates based on average
US usage figures. Interview with William Toal, Chief Economist, Portland Cement Association; Skokie, IL, December 17,
2001.
5 Grant, Jeremy. Investment in Roads Reinforces Cement Groups. Financial Times. 7 September 1999. via Lexis-Nexis.

Cross-Border M&A: The Return of Lafarge 3

 Eventually, growth by acquisition seemed to run its course leaving the company stagnant.
The company’s 1978 re-christening as Blue Circle Industries Ltd signaled the start of a decade
and a half of industrial diversification. Believing it could be more profitable, Blue Circle, like
other heavy building materials companies, expanded its interests beyond the narrow sector into
such areas as bathrooms, heating, landfill and incineration, lawn and garden care products and
property development.

By the early 1990s, the anticipated gains to shareholder value from diversification had
not materialized. Blue Circle began to reconsider its industrial composition. Some businesses
were sold outright (lawn products, landfill/incineration) while others were subject to
restructuring (bathrooms, heating). With a Canadian acquisition, cement assets began to grow
again. The result of the mid-1990s upheaval was a revamped strategy focusing on just three core
business divisions, Heating, Bathrooms, and Heavy Building Materials.

With both the Bathroom and Heating divisions restructured and most of the ancillary
businesses sold, Blue Circle looked to expand its cement holdings. The company took stock of
both the global cement industry and its major competitors. Consolidation was the industry’s
watchword. Generally, with ownership concentrated in a smaller number of hands, consolidation
was expected to produce more stable markets with reduced risks of disruptive pricing.
Competition intensified as the majors raced to acquire the most desirable assets and
consolidation quickly took on a life of its own. Companies faced a stark choice: grow or be
acquired. Blue Circle did not hesitate, initially choosing to grow by building more capacity. In
Malaysia, where between 1990 and 1997 consumption had expanded by 211%, but production
had seen only a 109% rise6, Associated Pan Malaysian Cement (APMC), Blue Circle’s
Malaysian associate company, decided to go forward with the construction of both a new
grinding plant and a new kiln. The new kiln was expected to “replace the 1.4 million tones [of
cement] APMC needed to import to meet demand.”7 In the Philippines, Blue Circle announced a
joint venture greenfield project.

In addition to its building spree, the Relative Exposures in Asia

company began to scout existing assets, looking Company Capital Sales EBIT
for appropriate portfolio additions. Although Blue BCI 28% 13% 1%
Circle controlled productive capacity in Asia, Holcim 14% 3% 2.5%
Africa and South America, by 1996, 87% of its Italcementi 13% 8% 4%
sales were still being generated in Europe and Lafarge 13% 2% --
North America. These mature markets at best Cemex 10% 2.5% 2%
would produce modest growth for the company. Heidelberger 1% -- --
Data Stream Advance Report, Geographic Profile, May 2001
However, assuming healthy macroeconomic
conditions, they could be expected to provide strong predictable cash flows—cash flows that
would support acquisitive growth in emerging markets where organic growth rates were more
robust. While other multinationals moved aggressively in Latin America and Eastern Europe,
Asia was without question the area in which Blue Circle was most enthusiastic about pursuing
expansion.

6 Cement Trade and Shipping: Forecast Developments to 2012. Ocean Shipping Consultants, Ltd. Surrey, UK, 2001.
7 Blue Circle Industries. 1997 Annual Report, Chief Executive’s Summary.

Cross-Border M&A: The Return of Lafarge 4

The Asian Situation

Asian countries had been delivering unprecedented growth rates since the mid-late 1980s.
From 1985-1990 the Asian cement market expanded 122.5%, a sharp contrast to the 5% decline
in non-Asian cement during the same period. While this made Asian assets highly coveted, they
were priced accordingly, if they came to market at all. Prior to the Asian financial crisis, non-
Asian interests controlled only about 4% of Asia's cement assets. When a desirable asset was
available for purchase, competition was fierce. Cemex, Holcim, and Blue Circle were most
active in the region. In 1995, Asia had a deficit of 11 million tons, and was a major cement
importer. With many Asian countries still jealously protecting local industry, Asia's local
producers were relatively unconstrained as they took on debt expanding production capacity to
meet local demand. Much of this debt was foreign currency denominated. The industry
expansion was on a grand enough scale that before the crisis and even with continued robust
demand growth; Asia was projected to be a net exporter of 11 million tons by 2005.

When the Asian financial crisis hit, heavy debt and collapsing demand were catastrophic
for local cement companies. The crisis forced countries to open their economies and allow
foreign firms to take greater ownership shares in the floundering companies. Distressed
companies were coming to market in large numbers and in many cases at prices well below
replacement cost. The sudden availability at such apparently bargain prices triggered a land-grab
mentality among the majors.

Despite the prevailing 'land-grab' atmosphere in Asia, the majors had other motives
behind their purchases. First, the sudden dramatic collapse in demand made the specter of cheap
Asian cement flooding into and destabilizing
Demand collapse in Asia pricing in the majors' key markets all too real.
1998 1999 2000F As Malaysia and the Philippines raised import
Malaysia -35.2% -14.7% 22% tariffs to protect domestic producers, there
Philippines -12% -4.7% -2.4% was little opportunity to redistribute the
Thailand -39% -13% 3%
surplus in Asia. Only about 14% of the
Indonesia -35% -1.6% 6.9%
Global Cement Report, 4th edition, 2001 oversupply could be consumed in Asia
through redistribution. This gave the
Americas huge appeal as relief markets. Gaining control of the cheap Asian production was seen
as one way to head off this impending disaster.

A second motivation for the major firms’ purchases in SE Asia was the opportunity to
use mature market cash flows to buy assets in emerging markets where organic growth had seen
strong annual increases for more than a decade. As per capita GDP reaches US $3000, countries
frequently begin to install the modern infrastructure necessary for further development. During
this growth stage, cement consumption rises dramatically and continues to expand until per
capita GDP reaches about US $15,000. At this point the growth reaches a plateau, which is
generally sustained for an extended period before consumption begins a gradual decline. Once
recovery was underway in these emerging markets, per capita consumption was expected to
follow the trend of healthy annual expansion for several years before markets matured and per
capita consumption began its natural decline.

Cross-Border M&A: The Return of Lafarge 5

 The third motivating factor was related to the benefits derived as a member of an
oligopoly. Once the majors were adequately invested in various markets, the collective
expectation was that they would be in a position to implement rational competition. In this case
rational competition meant a "respect for natural market shares, selective retirement of
underutilized [or old and inefficient] capacity and stronger pricing."8 Although rational
competition would never turn weak producers into strong players, it would certainly improve
margins for the oligopoly's members.

In the immediate Asian acquisition frenzy, from late 1997 into 1999, the western majors
spent about US $3.4 billion. Blue Circle alone spent nearly US$ 1 billion in the region. From
June 1998 thru May 1999, there was a cement deal announced every two weeks. In December of
1999, Merrill Lynch estimated that the majors still had another $2 billion available for Asian
investment. Even as they were being consummated, the Asian deals were fully expected to
generate negative returns for their new owners. There was a tacit understanding that the
companies had "no prospect of beating WACC for several years."9 Even returns equal to the cost
of debt were not expected to be realized in the near future. Surely this prospect generated less
pressure for family controlled firms (Cemex, Holcim, Heidelberger) than it did for the others. In
absolute terms, Holcim, Cemex and Lafarge had managed to accumulate larger Asian interests;
however, relative to total market capitalization and cash flows, Blue Circle with nearly 29% of
its assets in Asia had made the heaviest bet.

The turbulent Asian environment promised rich reward for the courageous, but threw
significant challenges in the path of all who tried to seize the ephemeral opportunity. In the
Philippines, pre-crisis prices of $70 per ton of cement plunged to $50 per ton in 1998 and then in
1999 collapsed to near the $25 mark. This sharp downward spike forced the last significant local
producer, Apo, to exit the market. Cemex grabbed the opportunity to extend its Philippine
coverage and consolidate its position there.

The Malaysian government kept tight control of its cement prices on the up side. This
had been the case since Blue Circle built Malaysia's first ever cement plant in 1953. The official
price ceiling for cement, unchanged since 1995, ranged from M$198 per ton on peninsular
Malaysia's west coast to M$212 on its east coast. In 1997 when the financial crisis began, there
was no regulation governing customer rebates. As Malaysia cancelled US$ 21.5 billion in
planned infrastructure spending seriously undermining demand, two small new entrants,
desperate to gain market share, started a price war. Early in 1998, Paribas Asia Equity assumed
rebates would probably be M$3 to M$5 per ton, at worst, rebates might reach M$10 per ton.
While the discounting seemed to stabilize (there was even some hope of its ending) late in 1998,
at the start of 1999 the war intensified. Rebates in Malaysia ballooned during 1999 to as much
as M$41/tonne yielding an average price of M$152 for the year. JP Morgan analysts estimated
that a M$10 change in the price of cement would produce a change of £8 million in BCI’s
operating profits. Cement use in Malaysia fell 37% in 1998 and a further 15% in 1999 pushing
plant operating levels to below 50% of capacity.10

8 Dy, Alfred, Ken Rumph, et al. Ownership Changes in Asian Cement. Merrill Lynch; December 1999.
9 Merrill Lynch. 1998-99-00 M&A, Brief to IFC, August 2000.
10 Operating levels of 60-65% are considered to be break even operating levels.

Cross-Border M&A: The Return of Lafarge 6

 The extent of BCI's difficulties began to come to light with the issuance of its June 29,
1999 interim trading statement. Analysts agreed that the problems were 'materially worse' than
had been expected. While analyst skepticism grew, BCI's new chairman, Rick Haythornthwaite,
declared the company was considering at least 30 possible deals and in an extremely good
position to take advantage of the industry's continuing consolidation.

On October 28, 1999, just one week before BCI was to take analysts to visit its Malaysian
facilities, the company issued a serious profit warning. With analysts’ forecasts ranging from
£285-310 million, citing operating losses in Asia, Blue Circle now expected group profits to be
only £260 million. As some analysts saw it that day, with earnings significantly below forecasts,
Blue Circle was now vulnerable to a take over. Nearly £520 million in stock market value was
erased during the day's trading. Blue Circle closed at 269 1/2, down 66 1/2 pence.

The Predator: Lafarge S.A.

Lafarge traces its corporate roots back to the Pavin family who in 1749 purchased the
Lafarge domain in France, an area known for its quality limestone. Auguste Pavin presided over
the building of two lime kilns and the beginning of the business. In 1864 the family signed a
contract to provide 100,000 tonnes of lime for the Suez Canal construction. By the turn of the
century (1900), as the company acquired cement and lime operations throughout France,
Lafarge’s strategy was centered on horizontal integration. Through its acquisitions, the company
became the largest lime producer in France. On the eve of World War 1, Lafarge owned the
capacity to produce 800,000 tonnes of lime annually. In the early 1960s, Lafarge tested
downstream vertical integration with its Canadian facilities, purchasing ready-mix concrete
operations as guaranteed outlets for its cement production. This vertical integration is now the
operating norm throughout continental Europe. The early 1960s were also the era of Lafarge’s
expansion into complimentary building products such as gypsum. Later the company established
an umbrella structure for specialty products, which included coatings, additives and paints.

Lafarge, like the other global cement players, was focused on its core, eager to exploit
opportunities for profitable growth and determined to expand its presence in emerging markets.
Where growth for cement operations in
mature markets was limited practically to Annual Cement Demand Growth Rates
what could be squeezed out by cost cutting, Developed Developing
normally about 2%, rising per capita GDP 1985-1999 2.10% 4%
drove emerging market growth. One study Thru 2010 0.70% 5.10%
Ocean Shipping Consultants
estimated that while global cement
consumption would remain relatively flat, the divergence between growth rates in the mature and
emerging markets would widen substantially. Some predicted Asia’s consumption growth would
average 7-7.25% annually and outstrip growth in every other area.

Although Lafarge viewed its business mix as a benefit providing “very stable cash flow
generation,”11 with multiple business units vying for available company cash, Lafarge’s cement
acquisition activities faced tighter constraints than did its pure cement company rivals (i.e.
Holcim and Cemex), where all funds earmarked for acquisition were used to purchase or expand

11 Mondellini, Luciano. Lafarge: The Need for Good Timing. Euromoney (London) August 1999.

Cross-Border M&A: The Return of Lafarge 7

cement assets. Even Blue Circle, with its multiple business divisions was more flexible. Within
a year of determining to re-focus the company on just three core businesses, BCI sold its core
bathrooms division, using the cash to buy more emerging market cement assets. When Lafarge
bought UK roof tile maker, Redland, in 1997, it further reduced its financial flexibility. The
company’s debt-equity ratio soared from 31% (December 1996) to 92% at the close of 1997.
Lafarge’s stated intent was to return to pre-acquisition debt levels within two years. The
company further committed to maintain its net debt-to-equity ratio at 80-82% and hold interest
coverage at a minimum of 4x, making timely, aggressive expansion into Asian cement all but
impossible.

Even with Lafarge’s limited slack, CEO Collomb was looking ahead. While
acknowledging Asia still had “several difficult years” to get through, in the company’s 1997
annual report he stated his intentions clearly saying, “This [financial] crisis presents us with new
growth opportunities…we must not miss out on the opportunity of acquiring promising positions
at advantageous prices.” In 1998 Lafarge was able to acquire a substantial 20% of the Philippine
market. Now, with a toehold in Asia, Lafarge made plans for further expansion. Its stake in the
Philippines gave Lafarge an ideal vantage point from which to watch and assess the region’s
tumultuous economic situation. Lafarge was well placed to evaluate new opportunities in
surrounding countries as the region regained a level of financial stability sufficient to warrant
new investments. In this regard, it focused its gaze on BCI’s investments in Malaysia

The Hostile Attempt

As the shock of Blue Circle’s profit warning began to wear off, something of a consensus
emerged in City opinion. The reaction had been too sharp, the sell-off to 265 was overdone, and
now the company appeared significantly undervalued. Ever alert for unexpected opportunity,
Lafarge watched the unfolding Blue Circle drama with keen interest. While Lafarge was not
fully prepared to make an offer when the rumors surfaced, they were considering the action
seriously. As it worked to make the financial case for acquiring BCI, Lafarge’s continued high
gearing was without question a non-trivial constraint. A second constraint was apparent at the
outset, competition issues in the great lakes region of North America. Both Blue Circle and
Lafarge had significant assets in the area. Combining the companies would produce a dominant
position in the region. While this constraint could be managed easily with the companies as they
were, in late 1999, Blue Circle had engaged in preliminary talks with US cement maker
Southdown. If a merger between the two were to succeed, BCI would be out of reach for
Lafarge due to US monopoly concerns. The need to preempt any BCI-Southdown deal may have
forced Lafarge’s hand.

The closer Lafarge looked, the more attractive the acquisition became. With the
exception of North America’s great lakes region, there was very little overlap in the two
companies assets. Certainly no other markets looked likely to raise the hackles of local
competition authorities. While Lafarge had been frustrated during the past two years by its
inability to move more quickly and aggressively in Asia, any lost ground could be made up with
a successful BCI acquisition. As Lafarge trumpeted to the press and all others who would hear
the miserable performance of BCI’s Asian assets, the performance of its own meager Asian
holdings was strikingly similar. After negligible operating income of €1.1 million and €.9

Cross-Border M&A: The Return of Lafarge 8

million in 1996 and 1997 respectively, Lafarge suffered losses of €18 million in 1998 and €25
million in 1999. That Lafarge’s share price escaped any serious decline linked to the sharp
reversals was attributed to the fact that the small percentage of sales Lafarge generated in the
region rendered the losses immaterial. Lafarge recognized the underlying truth and viewed the
steep Asian losses as their great asset-buying opportunity.

At the beginning of 2000, BCI’s most vexing

market looked less foreboding. The outlook for New Plant Returns (in £)
Malaysia had changed. Although for 2000 and the initial investment of GB £ 176
first half of 2001 Malaysian cement still tended to Tonnage (MT at 85% capacity) 1.3
look weak, expectations were increasingly optimistic. Average price 47
Operating under a scenario of earlier and steeper Annual sales 60
Production costs -22
recovery, Merrill Lynch raised its projections for
Administration -3
2004 a full 25%. There was a growing consensus that
Freight -3
the plunge in regional demand was an aberration and
Operating cash flow 33
that emerging markets in Asia would soon return to a
Depreciation -7
normal trajectory. Further, because of the recent
Operating profit £26
building spree in South East Asia, the region’s
ROCE 15%
cement industry ranked first in the world
Data from JP Morgan, August 2000
technologically with 87% of its capacity using the
modern, relatively energy efficient dry-process.
State-of-the-art facilities dramatically lower cash costs associated with operations. BCI
estimated that in each of its operating regions, a new plant would have cash costs 30-50% lower
than existing plants.12 With so much new technology in South East Asia, return on assets was
expected to climb above 20%, 5% higher than typically expected with new plant investment.

A common assumption among western companies operating and purchasing assets in SE

Asia was that in the immediate future, additional net capital expenditure would be unnecessary.
The age of the Asian assets combined with extremely low capacity utilization (less than 50% in
some areas of SE Asia during 1999) meant reinvestment of annual depreciation would be
sufficient through at least 2004. Beginning in 2005, net capital expenditures would be required
at levels to sustain asset growth roughly in line with projected growth in operating income. By
contrast, outside of Asia, assets were projected to grow with operating cash flows from the
outset. The western companies also made estimates of working capital requirements.
Operations in Asia were estimated to require an initial 100 million ringgit and non-Asian
operations requirements were estimated at an initial 200 million pounds.

On Friday, January 28, in anticipation of Lafarge’s bid, BCI shares rose 9%, closing at
343.5p. In light of the more positive news flowing from Asia, BCI management was convinced
the company had turned the corner and that its share price would be heading back toward the
previous highs near 475p. Following a Sunday night phone conversation with Rick
Haythornthwaite, Bertrand Collomb confirmed that Lafarge was contemplating a cash offer.
This news sent the stock up 70.5p to 414p. While never spoken, the offer price was estimated to

12 Betts, Mike, et al. European Construction and Building Materials Sector. JP Morgan. August 2000. Reductions primarily
attributed to reduced energy, maintenance and personnel costs.

Cross-Border M&A: The Return of Lafarge 9

be not more than 430p.13 Haythornthwaite dismissed the bid saying it “significantly undervalued
the company and did not merit discussion.”14 While there was speculation among some analysts
that Blue Circle might consider any offer above 450p, Mike Betts of JP Morgan asserted that by
his valuation 470p was a fair price. One analyst said BCI’s Asian holdings alone were worth
“the price Lafarge is offering for the whole company.”15 With non-Asian assets and a premium
tossed in, Blue Circle could have been valued at 500p.

Initially there was little in the way of a BCI defense. A war of words ensued. Collomb
snidely asserted BCI management could do nothing more than make promises. BCI management
issued a statement flatly saying the offer was “grossly undervalued and extremely unwelcome”
and went on to exhort shareholders not to take action based on Lafarge’s offer, but to hold their
shares.

Once Lafarge’s financing was in place, the threat to Blue Circle was tangible. During
February and March Lafarge bought Blue Circle shares aggressively. Paying an average 439p
per share for a net cost of €1.1 billion, it quickly accumulated 20% of outstanding BCI shares.
Lafarge advisor Dresdner Kleinwort Benson also bought Blue Circle shares, acquiring some 9%
of the company on behalf of its client.16 The clock was ticking. With strict timetables imposed
on takeovers from both sides of the channel, Lafarge and its advisors had acquired 29% of BCI’s
shares but still needed another 21% to gain control. In late April Lafarge raised its bid to
439.05p (or 450 if a special 10.95p dividend was waived).

Smarting from Collomb’s charges that BCI could only offer “unquantified promises and
uncertain prospects,” Haythornthwaite and his team set about the task of crafting a hard defense
for the company. BCI committed itself to delivering £116m annually through operating
improvements, a £118m Asian profit in 2002 (up 162% from 2000), “significant value” from its
property portfolio and £800m (£1 per share) returned to shareholders in cash. The last item was
to be accomplished in two tranches. The first £400m returned via share repurchase “as soon as
practicable” after the hostile offer lapsed. The second £400m, requiring separate shareholder
approval, would be returned before the end of 2000. In mid-April, BCI arranged a £1.6 billion
facility, in part to finance the first tranche return of capital. Blue Circle’s interest rate exposure,
according to its annual reports, rose from .6 in 1999 to 4.3 in 2000.17

Conventional wisdom says shareholders prefer cash in hand today to tomorrow’s share-
price uncertainty. So it was surprising when during the last week of April, just days shy of the
offer’s expiration, several of BCI’s largest shareholders came out in strong support of

13 In reality, the first offer was 420p.

14 Shah, Saeed. Lafarge To Raise Pounds 3.3BN Bid for Blue Circle. The Independent (London)
1 February 2000.
15 Kohli, Sheel. Lafarge Targets Weak Asian Tie in Blue Circle Bid. South China Morning Post (Hong Kong) 4 February 2000.
16 The arrangement between Lafarge and DKB seems to have been put in place to keep Lafarge well below the UK threshold of

30%, where a general offer becomes mandatory. However, this arrangement ran afoul of Canadian Competition Bureau rules.
Because BCI and Lafarge together controlled a dominant 60% of the market in Ontario, the two companies were restricted in the
amount of equity interest they were allowed to hold in the other company.
17 Blue Circle Industries, 1999 annual report states that a 1% interest rate rise in the currencies in which the Group has

borrowings or currency swaps and/or earns interest would decrease profits before tax by 0.6%. Likewise, in its 2000 annual
report they say that a 1% interest rate rise in the currencies in which the Group has borrowings or currency swaps and/or earns
interest would decrease profits before tax by 4.3%.

Cross-Border M&A: The Return of Lafarge 10

management. On May 3, the final day for the cash offer, it was the small shareholders with their
7-10% who were the deciding factor. Blue Circle could celebrate the moment; Lafarge had
overplayed its hand. This was the first successful defense of a cash bid by a FTSE 100 company
in almost 15 years. After a wobbly start, Haythornthwaite had engineered a creditable defense.
Serendipity played a helping hand as well. As tech stocks began their protracted decline,
perhaps investors were less eager to raise cash for new economy investments by abandoning
their old economy holdings. When it was all said and done, the cost of the battle tallied to more
than £100 million, with Blue Circle paying its advisors £37.5 million and Lafarge paying its side
nearly double that.

Between the Bids

Ready for a brain-teaser? Then try this conundrum for size. Six months ago, Blue Circle
shares were worth less than 300p. Then, last week, those same fund managers who demurred at
paying 300p for the shares, deigned to reject the chance to sell them for 450p. In the meantime
something dramatic had happened to the outlook for the global cement industry, presumably. Why
else would fund managers whose raison d'etre is the creation of wealth turn down such a
straightforward opportunity to bank a 50 per cent profit? …The few sweeteners offered in Blue
Circle's defence document hardly justify such a reversal of sentiment. …One can only hope that
Rick "Houdini" Haythornthwaite, Blue Circle's chief executive, will justify their faith.
Dan Gledhill in The Independent (London), 7 May 2000

Now Blue Circle faced the problem of life with a large minority holder. It was evident
that should Lafarge hold all of its shares and if the entire £800 million were returned through
buybacks, Lafarge could emerge with a nearly 40% holding. Nevertheless, Blue Circle was
determined to deliver on its promises to shareholders and to operate the company in ways that
would continue to add shareholder value. In May 2000, Blue Circle again held talks with the
largest independent US cement producer, Southdown, to discuss a possible purchase. BCI’s
dividend commitment made it hard to pursue expansion, but if a Southdown purchase were
successful, Lafarge’s stake in Blue Circle would be diluted, giving the company a bit more
breathing room. In the ensuing months, BCI’s shares languished. At a time when analysts rated
the other five majors as buy or strong buy, Blue Circle garnered a mere ‘market perform’. The
prevailing thought seemed to be that Lafarge’s large holding would keep BCI’s price tightly
bracketed. If the shares performed well, Lafarge would have opportunity to lighten its holding.
If the shares sagged, Lafarge would have another bid opportunity.

The failed bid did not leave Lafarge or its advisors draped in glory. Standard and Poor's
cut Lafarge's long-term debt rating to A- reflecting the uncertainty about Lafarge's plans for its
Blue Circle shares and concern over the company's "more expansionist financial policies."18
Both the company and analysts agreed that Lafarge’s earlier hope of maintaining a debt to value
ratio of .45 (debt to equity of about 0.80) had been unrealistic and that in the foreseeable future a
debt to value ratio of .60 would be the most likely sustainable ratio.

It was widely agreed that as little as an additional 10p per share could have secured the
majority for Lafarge. Instead, the company and its advisors were now facing at least €100
million of carrying costs for their combined (at this point) 32% stake. Lafarge and Dresdner also

18 Lafarge Long-term Rating Cut. AFX News Ltd. 17 May 2000.

Cross-Border M&A: The Return of Lafarge 11

had the Canadian competition authorities with which to contend. Under Canadian law, because
Lafarge and Blue Circle each held major market share, Lafarge was prohibited from holding
more than 10% of BCI, either directly or indirectly. Ultimately, Lafarge would have until 31
December 2001 to reduce its holding to less than 10%.

Prospects for BCI Assets

Following the failed takeover, not only had BCI escaped Lafarge, but in the first six
months of 2000, the entire outlook changed. Profits for BCI were improving. In the developed
world, consisting primarily of assets in North America and the Great Britain, BCI’s growth
prospects remained positive. However, while the crises of the late 1990s had not materially
affected these markets’ economies, there was growing uncertainty as to the future growth rates
for this region. Analysis by leading economic consultants recently retained by Lafarge had
projected three growth scenarios for BCI’s expected operating cash flows and fixed assets in the
developed world over the next 10 years. These scenarios and their estimated probabilities are
reported in Exhibits 3 and 4. Given that BCI is a U.K. firm, these forecasts are reported in
British pounds.

In Malaysia, BCI’s largest developing market, 2000 saw a seven-fold increase in new
public sector projects as the Prime Minister Mahathir’s government worked to revitalize the
economy. Cement demand surged more than 32% in response. The company's operating profits
in Malaysia rose 244% for the first half of 2000, faster than originally expected. Despite the
large excess capacity in the region as a result of the crisis, it was expected that the Malaysia’s
cement operations would regain their pre-crash market strength and merit new capital investment
within 4 years. Yet in this volatile region of the world, there was uncertainty as to how robust
and profitable this recovery and expected growth would be. New forecasts of operating cash
flows and fixed assets for three plausible growth scenarios for SE Asia over the next 4 years
provided by the economic consultants are presented in Exhibits 5 and 6.

Despite Malaysia’s positive prospects, there were storm clouds on the political horizon. At the
close of 1999, when Lafarge was plotting its first bid for BCI, Malaysia held elections for its
House of Representatives. Superficially, there seemed little cause for concern as the ruling
coalition National Front retained nearly two-thirds of the chamber’s seats; however, closer
examination revealed unsettling truths about the direction of politics in Malaysia. The Party
Islam Se-Malaysia (PAS) had just realized a stunning electoral success,
more than tripling its national parliamentary seats while retaining control Malaysia's Ethnic
Composition
of the state assembly in Kelantan and capturing the assembly in the
neighboring state of Terengganu.19 By January of 2000, PAS had Malay 58%
Chinese 27%
abolished bridge tolls and residential property taxes in Terengganu and
Indian 8%
announced “plans to halt gambling, limit alcohol sales, shut down Other 7%
entertainment centers…[and] impose a religious-based tax…on non- Source: CIA Factbook
Muslim businesses.”20

19 Singh, Jasbant. Malaysian Opposition Parties Plan Road Show to Woo Voters. Agence France Presse. 23 January 2000.
20 Ibid.

Cross-Border M&A: The Return of Lafarge 12

 The electoral success of the Alternative Coalition at the close of 1999 raised serious
questions about the staying power of the National Front and its lead political party, United
Malays National Organization (UMNO). Founded in 1946, UMNO has dominated Malaysian
politics since the country’s 1957 independence from Britain. One of the reasons for this
dominance has been a decades old affirmative action like economic policy favoring the majority
ethnic Malay population. Despite considerable progress toward its goals, the policy has stalled
in recent years. In the November 1999 election UMNO lost a considerable number of Malay
votes to PAS. As 2000 progressed, both coalitions fanned racial and religious flames. In a
November special election, held in Kedah, Prime Minister Mahathir’s home state (and home to
Blue Circle's most substantial Malaysian assets), the opposition won an assembly seat held by
the ruling coalition for 40 years. Not only had the ethnic Malay vote been split, but the
opposition had attracted support from Chinese and Indian voters previously considered sure
ballots for the National Front. Equally disturbing for the National Front was the fact that almost
all newly registered voters, primarily the young, voted for the opposition. The political winds
seemed about to turn.

The outcome of the next House of Representatives election21 is anything but certain,
calling into question Malaysia’s fixed exchange rate and economic growth policies. Prime
Minister Mahathir imposed currency controls and fixed the Malaysian ringgit at 3.8 to one US
dollar in September of 1998 to shield Malaysia’s economy from the region’s financial crisis.
Although meant to be temporary, in mid-2000, Minister of International Trade and Industry,
Rafidah Aziz confirmed that Mahathir’s cabinet had no plans to review the peg. The
government’s view is that the fixed exchange rate suits the Malaysian economy and business
community. Undervalued with respect to the US dollar by 10-20% at the time, Mustapa
Mohamed, advisor to the finance ministry, insisted that the Mahathir government would only be
concerned about ringgit undervaluation in relation to Malaysia’s neighbors, and then only “if
there was a wide distortion of 40-50% over a long period of time.”22 Mahathir is explicit about
his plans for continuing the peg, saying he will only consider lifting the peg and allowing the
ringgit to float if the international financial architecture is reformed. Mahathir’s likely UMNO
successor, Vice President Abdullah is widely seen as a safe bet to continue Mahathir’s policies.

While the Alternative Coalition’s plans for monetary policy, should they take power
nationally, are unclear, their view of the current government’s economic pump priming via
infrastructure project funding was made very clear as they called for official investigations into
spending on public works projects. A cutback of infrastructure projects, the most intensive user
of cement, would diminish growth in Malaysian cement demand seriously. As religious leaders
speak out against the evils of globalization and ‘rampant capitalism’, a 2004 opposition win also
calls into question the status of Malaysia’s open economy and it’s vibrant trade-fueled growth.
Additionally, country analysts expected that a victorious AC would promptly extend the tax
imposed on non-Muslim businesses to the entire country. Based on its actions in the state of
Terengganu, best estimates were that if elected, the Alternative Coalition would raise tax the
corporate tax rate in Malaysia to 40%. Moreover, there was some chance that if the economy
were doing poorly, the AC might nationalize the foreign owned cement assets in Malaysia.

21 Mandated by law to be held not later than 20 December 2004. The House of Representatives then selects the Prime Minister.
22 Ringgit Not Severely Undervalued. Malaysian Economic News. 22 June 2000.

Cross-Border M&A: The Return of Lafarge 13

 To deal with these political uncertainties in Malaysia, Lafarge had retained some political
risk consultants to provide some outlooks on possible political outcomes late 2004 and their
impacts on the returns to the assets in the future periods. Based upon the input from expert
political risk analysts, additional scenarios, and their conditional probabilities, for the operating
cash flows and fixed assets in Malaysia are included in Exhibits 5 and 6. In the case of the
nationalization, it was estimated that the compensation Lafarge would receive would be only
25% of the book value of the operating assets at the end of 2004. The forecast are values in
these exhibits are in Malaysian ringgit.

The outside economic consultants also provided some information on the relevant exchange rates
for the analysis. Data on previous end of year nominal exchange rates, as well as “equilibrium”
exchange rates based upon the assumption that Purchasing Power Parity held on average over the
past available data are presented in Exhibit 7. Information on expected inflation rates for each
currency in the future, as well as market information on interest rates, market premiums, taxes,
and political risk insurance, as well as detailed information on the growth rates of income and
assets for each scenario are given in Exhibit 8.

As for discount rates, for the cash flows, consultants had created representative portfolios of
firms in the cement industry for each of the two regions. The world ex-Asia representative
portfolio consisted of cement firms in North America and the UK in proportions that
approximated the distribution of BCI’s assets in this region. The SE Asia representative
portfolio consisted of Malaysian and other SE Asian publicly traded cement firms. It represented
the variability of returns to cement assets investments in this region, though not exclusively in
Malaysia, but it was based upon a much smaller set of representative firms. For each
representative portfolio, estimates of the levered equity betas against a variety of market
portfolios are presented in Exhibit 9. In addition, the exhibit provides approximations of the
representative portfolio’s capital structure, in the form of average equity to value (E/V) ratios, as
well as crude estimates of the beta of the debt for the representative portfolios against the various
market portfolios. This information, along with information in Exhibit 8 can be used to come up
with estimates of the discount rates for the two streams of free cash flows in order to obtain an
estimate of the base case valuation of BCI’s assets to Lafarge.

Getting to the Deal

The Financial Times advised Blue Circle “to deliver quickly on its promises” to provide
value for shareholders. To this end, BCI sold its 50% stake in its Danish interest, Aalborg
Portland, (the only holding the EC competition authorities had suggested might cause problems
in a successful acquisition) and its heating division, using proceeds to fund the first tranche of
capital return to shareholders. Despite the broader rosy scenario unfolding, BCI's share price
was less than 420p at the close of May. When it was time for the first tranche £400m buy-back,
the offer at 430p was subscribed more than twice over. While some analysts agreed that BCI had
turned the corner, and could trade at 445p, others said all the good news was already
incorporated in the price and the downside potential looked greater than the upside. Still mindful
of Lafarge's substantial holdings, BCI chose to return the second tranche £400 million as a
special dividend.

Cross-Border M&A: The Return of Lafarge 14

 At the same time, looking to increase its financial slack, Lafarge also completed a series
of disposals including the sale of its specialty products business for €1 billion. Without the
disposal, Lafarge would have seen its gearing rise as high as 109%. 23 Late in 2000, Lafarge
announced that while it would go ahead with investments of US$ 24-26 million in the
Philippines to achieve efficiency improvements, the company no longer planned to build
additional capacity there. These moves all seemed designed to clear the way to a renewed offer
for Blue Circle. Indeed, as 2000 came to a close, Bertrand Collomb was widely quoted in the
press as continuing to have strong interest in acquiring Blue Circle.

The past rancor between the two CEOs faded quickly enough. Press reports dissecting
the failure quoted both sides as saying there were no hard feelings, it had always been only about
price. By the fall of 2000, it was apparent that BCI would more than deliver on its promised
operational improvements, and the difficult Asian markets were staging a more vigorous
recovery than had been predicted earlier in the year. In December, it appeared that BCI and
Lafarge had never been anything other than the best of friends as they announced a joint
purchase of Pan African Cement. The two companies planned to incorporate Blue Circle’s
Zimbabwe operations as part of the deal. If there was any lingering acrimony, it evaporated as
Haythornthwaite and Collomb met over coffee at a hotel near Heathrow.

Now, in the first days of January 2001 Bertrand Collomb sat in his office with his
advisors and financial staff, trying to work out a new bid for BCI given the new information and
current market conditions. Even with the existing 32% stake, Lafarge decided to estimate the
value of BCI’s assets. To keep the analysis tractable, the team would valuation in parts, breaking
BCI assets into those in SE Asia and those in the rest of the world. Recognizing that these assets
were unlikely to have the same risk features, this breakdown allows the use of different discount
rates. In addition to a base case (all-equity) asset valuation, Lafarge’s treasury people have
decided to include in the estimate of BCI value a term for the PV of the interest tax shields that
will accrue to Lafarge from the desire capital structure following the purchase of BCI.. For this
the treasury assumes that Lafarge will try to move as soon as possible after the acquisition to a
desired capital structure where debt is around 30% of asset value. It is assumed that the interest
rate on Lafarge’s LT debt will stay at or near it current level following this change.

The goal of the case is to determine a maximum price Lafarge can afford to pay for BCI’s assets
based upon a base case APV valuation (under a simple worst case tax situation) plus the
estimated value of the financing that BCI add to Lafarge’s current balance sheet. This will
provide an implicit ceiling for any negotiations to avoid the acquisition being a bad deal for
Lafarge’s mostly continental European shareholders. While he desperately wanted to add BCI’s
assets to Lafarge’s portfolio, Collomb had no desire for this cross border acquisition to become
another case of the acquirer paying too much.

23 Batchelor, Charles. Lafarge Keen to Make Blue Circle Deal Stick. Financial Times 8 January 2001.

Cross-Border M&A: The Return of Lafarge 15

 Exhibit 1

BCI Balance Sheet

in pounds MM
ASSETS
1997 1998 1999 2000
Current assets
Cash 45.90 99.70 59.30 43.40
Accts receivable due w/in 1 year 412.90 454.70 374.50 488.60
Inventory (stocks) 282.20 325.40 217.00 327.80
Investments (deposits) 317.60 121.90 479.10 108.60
Total Current Assets 1058.60 1001.70 1129.90 968.40

Long Term Assets

Accts Receivable (due after 1 year) 101.30 118.60 148.10 170.00

Fixed Assets
Goodwill 87.60 142.80 479.30
Tangible Assets 1221.80 1624.20 1894.40 2567.50
Investments
JV share of gross asset 307.90 185.50 168.70 95.70
JV share of gross liability -152.60 -103.50 -88.10 -45.20
invest. in assoc and other 55.90 78.90 69.60 67.50
Total Investments 211.20 160.90 150.20 118.00
Net Fixed Assets 1433.00 1872.70 2187.40 3164.80
Total Assets 2592.90 2993.00 3465.40 4303.20

LIABILITIES & NET WORTH

1997 1998 1999 2000
Current Liabilities
Borrowings 259 276.9 364.4 539.8
Other Creditors 463.6 553.3 433.8 564.9
Current Liabilities 722.6 830.2 798.2 1104.7

Long Term Liabilities

Borrowings 347.80 508.50 507.20 1353.80
Subordinated Convertible Bonds 1.20 1.10 0.10
Other Creditor Provisions for Liabilities 150.30 161.90 137.20 143.60
Provisions for Liabilities 77.20 72.90 79.10 82.50
Government Grants 0.60 0.40 0.20 2.20
Total Long Term Debt 577.10 744.80 723.80 1582.10

Shareholder Equity
Ordinary Share Capital 378.60 389.30 404.80 360.10
Preferred Share Capital 80.60 48.70
Deferred Special Shares 22.00 45.60 81.70 81.70
Share Premium Account 377.80 392.40 411.90 423.30
Capital Redemption Account 46.50
Revaluation Reserve 36.10
Reserves of JV and Associations 92.40 71.00 60.60 25.60
Profit and Loss Accounts 254.90 342.90 768.90 173.30
Total 1242.40 1289.90 1727.90 1110.50
Minority Interests 50.80 128.10 215.50 505.90
Total Shareholder Equity 1293.20 1418.00 1943.40 1616.40
Total Liabilities and SE 2592.90 2993.00 3465.40 4303.20
acquirer paying too much.
Cross-Border M&A: The Return of Lafarge 16
 BCI Income Statement Exhibit 2

in pounds MM
1997 1998 1999 2000

Sales 1938.8 2021.4 2038.6 2127.3

COGS 1285.4 1350.8 1354.6 1330.1
Gross Profit 653.4 670.6 684.0 797.2
Net Operating Expense 401.9 403.7 430.5 471.5
Operating Profit 251.5 266.9 253.5 325.7
Joint Venture Profit 54.6 35.7 28.2 19.7
Associate Profit 14.2 9.5 6.8 3.6
Total Operating Profit 320.3 312.1 288.5 349.0

Exceptional Items -56.1 -10.0 -28.0 0.8

Pre-Interest Profit 264.2 302.1 260.5 349.8
Interest 17.9 31.1 65.9 103.9
Pre-Tax Profit 246.3 271.0 194.6 245.9
Tax 98.3 91.9 82.7 90.5
Income After Tax 148.0 179.1 111.9 155.4
Minority Interest 14.0 2.5 -23.6 18.3
Net Income 134.0 176.6 135.5 137.1

Dividends
Preferred 6.9 4.9 1.8
Ordinary 109.6 118.0 129.0 508.4

Retained Profit 17.5 53.7 4.7 -371.3

Cross-Border M&A: The Return of Lafarge 17

Exhibit 3
Conditional Operating Income, World Ex-Asia
(in GBP MM) year Real Term
real growth Prob 00 01 02 03 04 05 06 07 08 09 10 11 Rate

High 8% 0.3 320 352 387 426 469 515 567 624 686 755 830 867 2.5%
Medium 5% 0.5 320 342 366 392 419 449 480 514 550 588 629 653 1.8%
Low 2% 0.2 320 333 346 360 374 389 405 421 438 455 474 483 0.0%

Exhibit 4

Conditional Fixed Assets World Ex-Asia

(in GBP MM) year (in Pounds MM)
real growth Prob 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

High 6% 0.3 1944 2100 2267 2449 2645 2856 3085 3332 3598 3886 4197 4386

Medium 5% 0.5 1944 2080 2226 2381 2548 2727 2917 3122 3340 3574 3824 3969
Low 4% 0.2 1944 2061 2184 2315 2454 2602 2758 2923 3098 3284 3481 3551

Conditional Net Working Capital World Ex-Asia

(in GBP MM) year (in Pounds MM)
real growth Prob 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

High 6% 0.3 200 216 233 252 272 294 317 343 370 400 432 451

Medium 5% 0.5 200 214 229 245 262 281 300 321 344 368 393 408
Low 4% 0.2 200 212 225 238 252 268 284 301 319 338 358 365

Cross-Border M&A: The Return of Lafarge 18

 Exhibit 5

Conditional Operating Income, SE Asia

(In Malaysian ringgit MM)
Operating Income December 2004 Election Results Operating Income Terminal
Growth P= 2000 2001 2002 2003 2004 P= 2005 2006 2007 2008 2009 2010 2011 Real Grth
National Front retains power, Economic
70% 1473 1651 1851 2075 2326 2608 2767 3.0%
policies maintain high growth
HIGH 50% 200 320 513 821 1314
Alternative Coalition wins, Policies result
30% 1420 1535 1660 1794 1940 2097 2193 1.5%
in medium growth; tax to 40%
National Front retains power, Policies
60% 1097 1186 1282 1386 1499 1620 1694 1.5%
maintain status quo, medium growth
MEDIUM 30% 200 300 451 676 1015
Alternative Coalition wins, Policies result
40% 1067 1121 1179 1239 1302 1368 1404 -0.5%
in low growth, tax to 40%
NF retains power, Economy remains in
30% 700 736 773 813 854 898 921 -0.5%
low growth.
AC wins, Economy remains in low growth;
LOW 20% 200 270 365 493 666 30% 700 736 773 813 854 898 921 -0.5%
taxes rise to 40%
AC wins, nationalizes cement industry, 25% of 2004 SE
40% Asian Fixed Assets
0 0 0 0 0 0.0%
receive 25% of asset value

Cross-Border M&A: The Return of Lafarge 19

 Exhibit 6

Conditional Fixed Assets, SE Asia

(In Malaysian ringgit MM)
Fixed Assets Fixed Assets
Growth P= 2000 2001 2002 2003 2004 December 2004 Election Results P= 2005 2006 2007 2008 2009 2010 2011
National Front retains power,
Economic policies maintain high 70% 7688.1 8541.5 9489.6 10543.0 11713.2 13013.4 13807.2
growth
HIGH 50% 6920.0 6920.0 6920.0 6920.0 6920.0
Alternative Coalition wins,
Policies result in medium 30% 7480.5 8086.4 8741.4 9449.5 10214.9 11042.3 11550.3
growth; tax to 40%
National Front retains power,
Policies maintain status quo, 60% 7480.5 8086.4 8741.4 9449.5 10214.9 11042.3 11550.3
medium growth
MEDIUM 30% 6920.0 6920.0 6920.0 6920.0 6920.0
Alternative Coalition wins,
Policies result in low growth, tax 40% 7342.1 7790.0 8265.2 8769.4 9304.3 9871.8 10128.5
to 40%
NF retains power, Economy
30% 7342.1 7790.0 8265.2 8769.4 9304.3 9871.8 10128.5
remains in low growth.
AC wins, Economy remains in
30% 7342.1 7790.0 8265.2 8769.4 9304.3 9871.8 10128.5
LOW 20% 6920.0 6920.0 6920.0 6920.0 6920.0 low growth; taxes rise to 40%
AC wins, nationalizes cement 25% of '04
industry, receive 25% of asset 40% SE Asian 0 0 0 0 0 0
Fix Assets
value

Conditional Net Working Capital, SE Asia

(In Malaysian ringgit MM)
Net Working Capital Net Working Capital
Growth P= 2000 2001 2002 2003 2004 December 2004 Election Results P= 2005 2006 2007 2008 2009 2010 2011
NF retains power, economic
70% 111.1 123.4 137.1 152.4 169.3 188.1 199.5
policies maintain high growth
HIGH 50% 100 100 100 100 100 Alternative Coalition wins,
economic policies result in 30% 108.1 116.9 126.3 136.6 147.6 159.6 166.9
medium growth
NF retains power, economic
policies maintain status quo, 60% 108.1 116.9 126.3 136.6 147.6 159.6 166.9
MEDIUM 30% 100 100 100 100 100 medium growth
AC wins, economic policies
40% 106.1 112.6 119.4 126.7 134.5 142.7 146.4
result in low growth
NF retains power, economy
30% 106.1 112.6 119.4 126.7 134.5 142.7 146.4
remains in low growth state.
AC wins, economy remains in
low growth but taxes rise to 30% 106.1 112.6 119.4 126.7 134.5 142.7 146.4
LOW 20% 100 100 100 100 100
40%
AC wins, nationalizes cement
industry, receive 25% of asset 40% 0 0 0 0 0 0 0
value

Cross-Border M&A: The Return of Lafarge 20

 Exhibit 7

Historic Exchange Rates

US$/BP MYR/US$ US$/Euro Euro/Pound Rates Ringgit/Euro Rates
year end nominal nominal nominal year end Nominal WPI Adj CPI Adj year end Nominal WPI Adj CPI Adj
1985 1.4445 2.4265 0.9098 1985 1.5877 1.5814 1.5691 1985 - - -
1986 1.4745 2.6030 1.1014 1986 1.3388 1.5093 1.5338 1986 2.8668 3.008 3.391
1987 1.8715 2.4928 1.3114 1987 1.4271 1.4739 1.5117 1987 3.2691 3.163 3.330
1988 1.8095 2.7153 1.1844 1988 1.5277 1.4602 1.4569 1988 3.2161 3.278 3.350
1989 1.6055 2.7033 1.2294 1989 1.3060 1.4399 1.4066 1989 3.3233 3.145 3.290
1990 1.928 2.7015 1.3768 1990 1.4004 1.3837 1.3350 1990 3.7193 3.315 3.276
1991 1.8707 2.7240 1.3569 1991 1.3786 1.3548 1.3268 1991 3.6962 3.236 3.289
1992 1.512 2.6120 1.2392 1992 1.2202 1.3265 1.3344 1992 3.2367 3.287 3.344
1993 1.4812 2.7015 1.1442 1993 1.2945 1.2910 1.3535 1993 3.0911 3.190 3.344
1994 1.5625 2.5600 1.2540 1994 1.2461 1.2860 1.3500 1994 3.2101 3.417 3.372
1995 1.55 2.5420 1.3421 1995 1.1549 1.2614 1.3383 1995 3.4116 3.404 3.403
1996 1.698 2.5290 1.2624 1996 1.3451 1.2484 1.3324 1996 3.1925 3.505 3.447
1997 1.6538 3.8919 1.1116 1997 1.4878 1.2587 1.3085 1997 4.3263 3.765 3.484
1998 1.6635 3.8000 1.1812 1998 1.4083 1.2411 1.2844 1998 4.4886 3.863 3.637
1999 1.6164 3.8000 1.0046 1999 1.6090 1.2423 1.2843 1999 3.8175 3.849 3.662
2000 1.4922 3.8000 0.9305 2000 1.6037 1.2790 1.2800 2000 3.5359 3.522 3.614

Cross-Border M&A: The Return of Lafarge 21

 EXHIBIT 8

Expected Market Premiums Long term interest rates

Expected French Market Premium over Eurozone Risk Free 7.0% (10 year gov't securities)in local curency
Expected Eurozone (EU) Market Premium over Eurozone Risk Free 6.5% Eurozone 4.85%
Expected World Market Premium over Eurozone Risk Free 6.0% UK 4.78%
Expected US Market Premium over Eurozone Risk Free 6.5% US 5.23%
Expected SE Asia Market Premium over Eurozone Risk Free 8.0% Malaysia 5.88%
Expected Inflation: Lafarge's debt rate (€) 5.9%
expected world real risk free rate = 2.8% Eurozone 2.1%
UK 2.0%
Malaysia 3.1%
US 2.5% Net Working Capital
Tax Rate Information: World ex-Asia operations
Local Taxes in SE Asia, pre-2004, t*c 28% Working capital at end of 2000 (MM) = £200
Expected taxes if Alternative Coalition comes to power in Malaysia for 2005 and beyond t*c 40% Years 2001-2010 assume that NWC grows at same rate as fixed
Withholding taxes on dividends from SEAsia to France 5% assets
SE Asian operations
World Ex_Asia average corporate tax rate, t*c 35% Working capital at end of 2000 (MM)= MYR 100
Withholding taxes on dividends from World-exAsia to France 5% years 2001-04 assume that NWC growth is zero
French Corporate Taxes 33% assume that NWC grows at same rate as fixed
years 2005 on
Lafarge Three year Average Historic Effective Tax Rate 30% assets

Real Growth Rates

SEAsia, High Scenario SEAsia, Medium Scenario SEAsia, Low Scenario
Op Inc growth to 2004 57% Op Inc growth to 2004 47% Op Inc growth to 2004 32%
Op Inc growth, 2005-2010 9.0% Op Inc growth, 2005-2010 5.0% Op Inc growth, 2005-2010 2.0%
Fixed Asset growth to 2004 -3.1% Fixed Asset growth to 2004 -3.1% Fixed Asset growth to 2004 -3.1%
Fixed Asset growth to 2005-10 8.0% Fixed Asset growth to 2005-10 5.0% Fixed Asset growth to 2005-10 3.0%
Terminal Growth 3.0% Terminal Growth 1.5% Terminal Growth -0.5%

World Ex_Asia, High Scenario World Ex_Asia, Medium Scenario World Ex_Asia, Low Scenario
Op Inc growth to 2010 8.0% Op Inc growth to 2010 5.0% Op Inc growth to 2010 2.0%
Fixed Asset Growth to 2010 6.0% Fixed Asset Growth to 2010 5.0% Fixed Asset Growth to 2010 4.0%
Terminal Growth of FCF 2.5% Terminal Growth of FCF 1.8% Terminal Growth of FCF 0.0%
* Terminal Growth is for both operating income and fixed assets beyond 2010

Selected Risk Premia Indicators

Malaysia sovereign US$ bond index spread Political Risk Insurance Premiums: Malaysia
relative to comparable US Treasury (bps) (annual premium) on book value of assets protected Aon and Syga are private insurers
6/15/2000 252 AON Syga MIGA MIGA is the World Bank political risk insurer
9/15/2000 234 Insurance rates for exproriation/nationalization
Confiscation 1.30% 1.25% 1.20%
12/15/2000 273 Insurance only for 90% of covered loss
1/5/2001 261 Insurance based upon BV of assets

Cross-Border M&A: The Return of Lafarge 22

EXHIBIT 9
Representative Portfolios
Cost of Capital Grid World ex_Asia Cement Asset
portfolio
Beta estimates of representative E/V = 0.6 bA rf rM-rf E(rA)
portfolio against: bE bD
World Market Portfolio estimate 0.15 calc 4.9% 6.0% calc
Market French Domestic Market Portfolio estimate 0.07 calc 4.9% 7.0% calc
Portfolios EU Domestic Market Portfolio estimate 0.12 calc 4.9% 6.5% calc
SE Asian Market Portfolio estimate 0.09 calc 4.9% 8.0% calc

SE Asia Cement Asset portfolio

Beta estimates of representative E/V = 0.4

portfolio against: bE bD
World Market Portfolio estimate 0.30 calc 4.9% 6.0% calc
Market French Domestic Market Portfolio estimate 0.25 calc 4.9% 7.0% calc
Portfolios EU Domestic Market Portfolio estimate 0.25 calc 4.9% 6.5% calc
SE Asian Market Portfolio estimate 0.35 calc 4.9% 8.0% calc

Cost of Capital in Euros Cost of Capital

World ex Asia Assets bA rf rM-rf %
Integrated Markets
World Mkt calc 4.9% 6.0%
Segmented Markets
French Mkt calc 4.9% 7.0%
EU Mkt calc 4.9% 6.5%
SEAsia Mkt calc 4.9% 8.0%

SE Asia assets
Integrated Markets
World Mkt calc 4.9% 6.0%
Segmented Markets
French Mkt calc 4.9% 7.0%
EU Mkt calc 4.9% 6.5%
SEAsia Mkt calc 4.9% 8.0%

Cross-Border M&A: The Return of Lafarge 23