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PARIS/ZURICH (Reuters) - The worlds' two largest cement makers, Lafarge LAFP.PA and Holcim HOLN.VX, are in advanced talks to merge into a company with a stock market value of over $50 billion (30 billion pounds) in what would be the industry's biggest ever tie-up.
The discussions, which are likely to draw close scrutiny from European competition watchdogs, are "based on principles consistent with a merger of equals", Paris-listed Lafarge said in a statement on Friday.
The company said no agreement had yet been reached with Switzerland's Holcim and that there was no guarantee of a deal, but said there was a "strong complementarity" and "cultural proximity" between the two.
Shares in Lafarge rose 8.9 percent to a 4 1/2 year high, the top gainers on the French blue-chip CAC 40 index .FCHI. Holcim stock rose 6.9 percent to a near four year high.
Such a merger would be Europe's biggest tie-up this year, Thomson Reuters data shows, based on the cost to acquire the target and assuming that Lafarge, with the smaller market value, is the target company.
A deal would allow Lafarge and Holcim to slash costs, trim debt and reduce worldwide overcapacity that has weighed on the market in recent years.
But any deal is likely to draw scrutiny from European competition watchdogs, as a Lafarge-Holcim entity, with combined sales of over 30 billion euros, would have a dominant position in both Europe and the United States.
"I think this will be a story that develops over a year or more," said Morningstar analyst Elizabeth Collins, adding that antitrust regulators would likely require the companies to shed cement plants and distribution facilities before approving any merger.
Both companies have significant and overlapping capacity in countries such as France, Germany, Spain, Czech Republic, Romania and Serbia, she said.
Shares across the cement sector rose on the news, on anticipation that Lafarge and Holcim may have to divest assets that could boost smaller players.
Shares in Germany's HeidelbergCement (HEIG.DE) closed up 4.3 percent, the leading gainers on the DAX top-30 index .GDAXI. Shares in Ireland's CRH (CRH.I) and Italy's Buzzi Unichem (BZU.MI) and Italcementi ITAI.MI also rose.
Shares in Mexico's Cemex (CMXCPO.MX), also one of the world's biggest cement companies, were up 3.8 percent in Mexico City.
"It's good for the market. Things are boiling up on the M&A front, not only in the telecoms sector but also in the construction sector," said Clairinvest fund manager Ion-Marc Valahu. "There's overcapacity and they need to consolidate their balance sheets."
For Lafarge, a merger would make a lot of sense at a time when both companies are striving to trim debt resulting from major acquisitions in the past decade.
Lafarge bought Egypt's Orascom Cement for 8.8 billion euros ($12 billion) in 2008, while Holcim paid about $3.4 billion (2.0 billion pounds) for Aggregate Industries in 2005.
Lafarge's debt pile has led to "junk" ratings from credit rating agencies Standard & Poor's and Moody's. The company has been slashing costs and selling non-core assets to trim debt, and aims to regain an investment grade by the end of this year.
Natixis analyst Abdelkader Benchiha estimates a deal would help Lafarge nearly halve its fixed and variable costs. Holcim has a better credit rating than Lafarge and the group could benefit from lower borrowing costs, he said.
"On a geographical and industrial point of view, a merger would be meaningful," he said.
Lafarge is strong in Africa and the Middle East, where Holcim is almost absent, he said. On the other hand, Holcim was strong in Latin America, where Lafarge was not established.
"But such a deal could face execution risks, notably with competition issues," Benchiha said. "There would be potential antitrust problems in the U.S., Canada, Brazil and France, where a Lafarge-Holcim entity would have a dominant position."
Groupe Bruxelles Lambert, Lafarge's main shareholder, had no immediate comment. Holcim's largest shareholder, Thomas Schmidheiny, declined to comment.
Additional reporting by Sudip Kar-Gupta in London, Alexandre Boksenbaum-Granier and Blaise Robinson in Paris, Oliver Hirt in Zurich; Editing by James Regan and Sophie Walker