OREANDA-NEWS. Fitch Ratings has affirmed Germany-based HeidelbergCement AG's (HC) Long-term Issuer Default Rating (IDR) at 'BB+' and Short-term IDR at 'B'. The Outlook on the Long-term IDR is Stable. The agency has also affirmed the senior unsecured rating of debt issued by HC's related entities, HeidelbergCement Finance Luxembourg SA and Hanson Ltd at 'BB+'.

The rating actions follow HC's announcement that it is acquiring Italcementi SpA and its Moroccan minorities, adding net debt of around EUR6.5bn on a pro-forma basis. HC intends to finance the EUR4.3bn equity consideration (including Moroccan minorities) with EUR800m in shares sold to the seller, EUR1bn in disposals, EUR800m in capex and working capital savings and the remaining EUR1.7bn through a combination of operational cash flow and additional debt.

The affirmation reflects HC's improved scale, diversification, market positions and synergy potentials. HC's business profile, already compatible with an investment-grade rating, will benefit from Italcementi's complementary manufacturing footprint, established market positions and well invested asset base. We consider the Italcementi acquisition a temporary deviation from HeidelbergCement's historical commitment to reduce leverage and obtain an investment-grade rating. We expect pro-forma funds from operations (FFO) adjusted leverage to fall towards a level commensurate with the current ratings of 4.5x by end-2016.

The Stable Outlook is predicated on the assumption of a post-closing FFO adjusted leverage of around 4.5x, a general recovery in many of HC and Italcementi's end-markets, stringent capex and working capital cuts resulting in healthy positive cash flow generation for the combined group. It also assumes that already identified disposals of around EUR1bn will be executed over the next 12-18 months.

KEY RATING DRIVERS
High Leverage
FFO adjusted leverage of 5.2x at end-2014 remains high for the ratings. Fitch expects FFO adjusted leverage (pro-forma of the acquisition) to fall towards 4.5x in 2016, following the receipt of more than EUR1.2bn in cash proceeds from the building products disposal and the acquisition of Italcementi. HC plans to fund the acquisition with a combination of disposal proceeds (EUR1bn), shares (EUR800m) and capex and working capital savings (EUR800m). Our projections are predicated on the assumption of a recovery in HC and Italcementi's markets and solid margins over the coming years.

Improving Business Profile
Following the acquisition of Italcementi, HC will reinforce its position as the world's leading aggregates producer with around 275mt aggregates capacity, ranking second globally in cement and number three in ready mix products. HC's business profile, already compatible with an investment-grade rating, will benefit from increased geographical diversification and solid market positions across a wider global manufacturing network.

Complementary Italcementi Plants
We consider HC's strategic rationale for the acquisition of Italcementi sound. The two groups have a broadly complementary manufacturing footprint, with Italcementi opening new attractive growth markets for HC in Thailand, Egypt and Morocco. Some overlap exists in countries such as North America, India and Kazakhstan, where we expect good growth in the coming years.

Synergy Potentials
HC intends to reap EUR175m in annual synergies from 2018 onwards through purchasing, commercial, selling, general and administrative expenses and operational cost synergies. In addition, management intends to make capex savings of EUR220m on a run-rate basis from 2017, with initial capex and working capital savings of EUR415m in 2015. We consider some capex and working capital savings realistic, given Italcementi's well invested asset base and HC's successful working capital management over the past years.

Healthy Current Trading
HC posted a strong performance in 1H15 with revenue and EBITDA growth of 11% and 22%, respectively. The operating performance was supported by volume growth in all business lines and in particular pricing growth against the backdrop of healthy demand in North American and the Africa-Mediterranean Basin. Fitch expects a solid operating performance in 2015, given good construction activity in the US and in key markets in north-western Europe.

Building Products Disposal
The disposal of the group's North American and UK building products business is credit positive. The loss in diversification from this business is limited and offset by the increase in profitability from its deconsolidation and the relief to credit metrics from the receipt of more than EUR1.2bn in cash proceeds. The entire building products segment, of which the disposals form part, contributed 7% to group revenues in 2013 (excluding intra-group eliminations).

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
Commitment to and track record of maintaining a credit profile commensurate with an investment grade rating, including FFO gross leverage below 3.5x and positive FCF generation on a sustainable basis.

Negative: Future developments that could lead to negative rating action include:
Further debt-funded acquisitions, a slower than expected recovery in end-markets, failure to execute at least EUR1bn in disposals or make EUR800m in capex and working capital cuts, resulting in FFO gross leverage in excess of 4.5x on a sustainable basis or continued negative free cash flow.

LIQUIDITY
Liquidity is adequate consisting of EUR2.8bn from undrawn committed facilities at end-1H15, compared with EUR2.3bn of debt maturities over the following 12 months. Fitch considers around EUR1bn as not freely available, which includes EUR800m of cash at local subsidiaries and EUR200m in intra-year working capital swings. We note that cash in countries with exchange controls can be repatriated via dividends, although we do not consider this cash readily accessible for ratio calculation purposes.

KEY ASSUMPTIONS
- Sales growth from recovery in western European and North America, continuous growth in emerging markets.
- Earnings improvement from increased volumes and cost-cutting.
- Continued dividends as in previous years.
- Positive FCF from growing internal cash flow and reduced capex.
- Italcementi acquisition partly funded with EUR1bn in disposal proceeds and EUR800m shares.