OREANDA-NEWS. A collapse of Holcim and Lafarge's proposed merger would be credit negative for Lafarge, broadly neutral for Holcim and positive for the credit profile of CRH, Fitch Ratings says. CRH's financial profile would improve because its commitment to acquire assets from the merging companies is contingent on merger completion.

Holcim's decision to demand a renegotiation of its merger with Lafarge adds to the inherent transaction risk of the mega-merger, but we believe it is still likely to go ahead, as the strategic and operational rationale remains intact. Both companies have also made significant progress with the deal, including obtaining EU regulatory approval and negotiating the asset sale to CRH in one packaged deal.

The divergence between Holcim and Lafarge's equity valuations since the deal was first agreed means Holcim's shareholders are no longer willing to accept a merger of equals. A statement from Lafarge saying its board is willing to consider a revised share-exchange ratio reinforces our view that a new agreement is still in reach. But an attempt to renegotiate other elements of the deal, such as the intended governance structure, would be less likely to be successful. A renegotiation of exchange ratios would be credit neutral in a pure-share deal.

Failure to complete the merger would probably lead to the resolution of the Rating Watch Positive on Lafarge and would leave the company little headroom at its 'BB+' rating due to its relatively high leverage. Holcim's 'BBB'/Stable rating would be unaffected as the group already has a business profile at the top of the natural ratings range for the building materials sector, due to the industry's capital intensity and cyclicality. The increase in diversification, improvement in market positions and synergy potential created by the merger would not materially improve our evaluation of the group's business profile.

The successful merger of Holcim and Lafarge is a precondition of CRH's EUR6.5bn deal to buy assets from both companies. The Rating Watch Negative on CRH's 'BBB' rating would probably be resolved if the deal collapsed, as it reflects uncertainty about CRH's ability to ease the debt burden that would stem from the deal.

We expect to publish a more detailed report on the EMEA building materials sector in the next few days, including an assessment of how M&A sets the scene for 2015 and beyond.