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(Bloomberg Gadfly) -- A dog deal might just have its day. CEO Eric Olsen has put the $35 billion merger of cement makers Lafarge and Holcim on a firmer foundation. He just can't afford to slacken the pace.

Stock's gain since February 2016


The stock has gained more than 75 percent since February 2016, when asset write-downs and faltering demand in emerging markets were starting to make the Franco-Swiss marriage seem like a colossal mis-judgement.

One of the architects of the deal, former chairman Wolfgang Reitzle, has moved on, while another, co-chairman Bruno Lafont, is on his way out. So Olsen -- an unexpected pick for the CEO job -- now has some breathing space.

So far, he hasn't wasted it.

Cost-savings from the deal were 16 per higher in 2016 than anticipated, the company said on Thursday. Olsen has also kept capital expenditure in check, something that's refreshing in an industry that's consistently over-invested in new capacity.

He hasn't chased volumes at the expense of margins: like-for-like cement sales declined 6 percent in the fourth quarter, but higher prices more than offset the forgone profit.

Net income and cashflow are all much improved compared with a year ago. Those, together with some asset sales, helped to reduce net debt by 15 percent to a more comfortable 14.7 billion Swiss francs ($14.5 billion).

Olsen now has a bit more room to reward shareholders for their forbearance -- and plans to use it. With a 2 franc dividend payment due in 2017, the stock yields more than 3 percent, and the company plan to buy back 1 billion francs of stock between now and the end of 2018.

Even so, LafargeHolcim Ltd. doesn’t yet deserve a clean bill of health. The shares remain about 15 percent below their level when the combined company started trading in July 2015. The stock doesn’t look especially cheap either -– it trades on almost 20 times estimated earnings, in line with rival Heidelbergcement.

Furthermore, LafargeHolcim’s roughly 50 billion francs of invested capital isn’t yet earning its keep: while return on invested capital climbed to 5.6 percent in 2016, that’s still substantially below the company's 7 percent cost of capital.

Until now, Olsen hasn’t had much help from growing sales. The company expects global demand for cement to grow by as much as 4 percent in 2017 -- and, in time, it may get some help from Donald Trump's promised infrastructure spending. North America accounts for about a fifth of sales and the company has room to expand that without adding capacity.

Olsen may be bullish about demand in the U.S., but until the Trump boom becomes a concrete reality, he'll need to make sure LafargeHolcim sticks to its self-help program.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

To contact the author of this story: Chris Bryant in Berlin at cbryant32@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

©2017 Bloomberg L.P.

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