OREANDA-NEWS. Fitch Ratings has placed West China Cement Limited's (WCC) Long-Term Issuer Default Rating (IDR), senior unsecured and bonds ratings of BB- on Rating Watch Positive. This follows the announcement that Anhui Conch Cement Company Limited (Conch, A-/Stable) plans to increase its shareholding in WCC to around 51% and, if successful, will make a tender offer for the remaining shares in WCC.

KEY RATING DRIVERS

Conch's acquisition of WCC: On 27 November 2015, WCC and Conch entered into an acquisition agreement whereby Conch will inject four of its cement plants in Shaanxi province into WCC in return for new WCC shares. The transaction is subject to several conditions, including the approval from independent shareholders of WCC. After the transaction, Conch's shareholding in WCC will increase to approximately 51% from 21% currently. Conch will then make a mandatory unconditional cash offer for the remaining WCC shares.

The acquisition will trigger the Change of Control (COC) clause of WCC's USD400m senior notes due 2019 only if it results in a rating downgrade by at least one rating agency.

Integration drives rating level: Fitch will resolve the Rating Watch once the transaction is completed, and there is greater clarity on Conch's plans for WCC after it gains control. Conch has stated that it intends to maintain WCC's public listing and nominate new board members.

Fitch's assessment of WCC's rating will be in accordance with its Parent and Subsidiary Rating Linkage criteria. If WCC continues to operate independently with its own brand and operational and financial management, we will likely apply the bottom-up approach of the criteria, with WCC's rating uplifted by one or more notches from its current level.

However, if Conch integrates WCC into its operations, particularly if WCC's debt is refinanced with Conch debt and/or is guaranteed by Conch, we are more likely to apply the top-down approach of the criteria. Under this scenario, WCC's rating will be notched down from Conch's rating.

Merger should improve margins: A merger of WCC's and Conch's operations in Shaanxi will mean they will control close to half of the cement market in the province. This should give the combined entity significant pricing power in a market that has been plagued by price wars in recent years, which have eroded margins.

KEY ASSUMPTIONS
- Conch will complete its acquisition of WCC as proposed.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Completion of the transaction and the general offer
- Integration of WCC into Conch's operations

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- If the transaction is not completed, Fitch will likely affirm WCC's current ratings with a Stable Outlook