The boards of Lafarge (LAFP.PA) and Holcim (HOLN.VX) met separately on Tuesday to try and salvage their merger to create the world's biggest cement firm, two sources said.
Holcim called a halt to the deal on Monday, pressing for the price and management structure to be changed from the original "marriage of equals", which named Lafarge boss Bruno Lafont as chief executive of a combined company.
One source said ahead of the Lafarge board meeting that the French firm would not accept renegotiations on the governance of the new company. The original merger agreement also designated a board made up of seven members from each company.
"The board cannot give satisfaction to Holcim on all points," the source said. "It cannot accept both a change of parity and a taking of control."
The second source said the Holcim board would discuss all possible scenarios.
Holcim and Lafarge presented the deal in April last year as a merger of equals with a one-for-one share swap.
But Holcim shareholders, who would have ended up with 53 percent of the merged entity under the original terms, have recently been demanding better terms as the earnings outlooks of the two companies have diverged.
On Sunday, Holcim said it wanted to open talks on the exchange ratio and on "governance issues" because the original merger terms were no longer acceptable to its board.
Lafarge said on Monday it would consider revising the share exchange ratio, but nothing else.
According to another person familiar with the situation, Holcim has proposed changing the agreed one-for-one share exchange ratio to 0.875 Holcim shares for each Lafarge share, but the French company wants a 0.93 to 1 ratio.
LAFONT QUESTIONS
A Holcim shareholder who opposes the deal said the appointment of Lafarge's Lafont as head of the new company has become a bone of contention, with some questioning his ability to deliver promised cost savings of 1.4 billion euros a year.
Lafont has headed Lafarge since 2007 and was the architect of the acquisition of Egypt-based peer Orascom that saddled the company with debt. He has clashed in recent weeks with some executives at Holcim, said the shareholder, who declined to be named.
A Paris-based analyst said Lafont would emerge weakened from the saga, regardless of whether the deal can be saved.
"Both of them have a lot to lose if the deal fails, but the share price moves in recent days show that Lafarge arguably has more to lose than Holcim," he said.
A Lafarge shareholder who declined to be named said that he had not yet started selling his shares but would do so if the deal fell through.
"I still think the four major shareholders (of Lafarge and Holcim) will be able to reach some sort of arrangement since their stakes would be worth more after the merger," said the Lafarge shareholder.
Belgian investors Paul Desmarais and Albert Frere own 21 percent of Lafarge via a holding company, while Egyptian businessman Nassef Sawiris owns 16 percent.
On the Holcim side, Thomas Schmidheiny, an heir of the company's founder and its former chairman, owns a 20.1 percent stake, and Russian businessman Filaret Galchev owns 10.8 percent via Eurocement Holding AG.
PROFITABILITY
Lafarge shares were trading down 2.5 percent at 59.38 euros at 1627 GMT, roughly in line with the value implied by the 0.875 for 1 share exchange ratio. Holcim was down 2.2 percent.
Credit rating agency Fitch said a failure of the merger would be negative for its view of Lafarge since the firm would have little headroom at its 'BB+' rating due to high leverage.
The Paris-based analyst said the combined group would have a return on investment of about 10 percent while separately they now achieve 5 or 6 percent.
Both groups have cost savings plans in place that aim to improve profitability, but if they go ahead separately the plans would only get them to about an 8 percent return on investment.
Ireland-based building materials group CRH (CRH.I) could become collateral damage if the Holcim-Lafarge deal unravels since it was to buy a chunk of European assets from them to appease competition authorities.
CRH is due to hold an extraordinary shareholders meeting on Thursday to ratify the acquisition, which has put pressure on Lafarge and Holcim to sort out their differences first.
If they cannot do so, the asset sale to CRH will be cancelled and the Irish company will get a break-up fee of 158 million euros.
CRH shares were down 3.1 percent at 23.49 euro per share.
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