Analysis: What Martin Marietta’s purchase of Bluegrass means

By |  June 29, 2017

Two major transactions involving aggregate producers have gone down in the course of a month.

First, it was Vulcan Materials Co. acquiring Aggregates USA LLC in a $900 million deal. Now, Martin Marietta Materials Inc. is purchasing Bluegrass Materials Co. for $1.625 billion.

What does this deal mean for Martin Marietta, and what effects will it have on the market? FMI Capital Advisors Inc.‘s George Reddin provides some insights.

“This deal was important for Martin Marietta as they really strive where possible to stay as a pure aggregate producer and dodge vertical integration,” says Reddin, managing director at FMI.

Bluegrass does indeed fit the mold Reddin describes. By Martin Marietta’s definition, Bluegrass is the “largest privately-held, pure-play aggregates company in the United States.” So on makeup alone Bluegrass is a match for Martin Marietta, according to Reddin.

George Reddin

“Historically Martin Marietta has done fewer deals than a lot of companies, but they’ll do the bigger deals and spend a lot of time on greenfield sites, the productivity of their operation and reinvesting in the business to make them more efficient,” he says. “So I would think that model would continue.”

Other benefits

The Bluegrass deal also offers Martin Marietta access to new markets – and it positions Martin Marietta to potentially expand further, Reddin says.

“The other part of the deal is a market extension to Maryland and Delaware,” he says. “That positions them to look into Pennsylvania and the Northeast. But in the Northeast they would run into some more vertically integrated markets and union operations.”

In addition, acquiring Bluegrass assets in Georgia and South Carolina enhances Martin Marietta’s existing footprint in those states.

“If you think about markets like Georgia and South Carolina, they have tremendous opportunity for synergies there,” Reddin says.

Acquiring an aggregate producer such as Bluegrass was fundamental to Martin Marietta’s strategy, according to Reddin.

“This was a must-have deal for their growth strategy, for their market extension and for just keeping up in the game,” he says.

Another private equity deal

Also, like Vulcan’s acquisition of Aggregates USA, Martin Marietta’s Bluegrass deal involves a private equity firm seizing the opportunity to cash out of an investment while the market dynamics are ideal.

In Bluegrass’ case, one of the sellers is Lindsay Goldberg LLC, which reportedly stands to make a return more than three times greater than the capital it invested seven years ago.

“Private equity firms want to generate returns for their partners in as short a time period as possible – three, four, five years is the sweet spot,” Reddin says. “The capital is patient up to a point. A lot of people would say seven years is near the outside of the ideal hold period. Here we are at seven years [with Bluegrass] as the initial investment was made in 2010. I think this was an opportune time for Lindsay Goldberg to [sell] with the market in its current shape and just based on their private equity model.”

Looking ahead

Now that Bluegrass has moved – plus considering that Vulcan is acquiring Aggregates USA’s assets – Reddin’s expectation is for more deal-making, albeit of the small- to medium-sized variety.

“This is going to help ignite the small- to medium-sized deals in the sector,” Reddin says. “You have a lot of family-owned or influenced businesses watching all of this. They’re starting to have conversations along the lines of ‘maybe now is the right time to sell.'”

So expect to see a slew of these sorts of deals over the next couple of years.

“I think we’ll see that wave,” Reddin says. “It will be more of the small strategic bolt-on and medium-size platform type of deals. Those tend to be somewhere in the $25 million to $150 million range.”

The mega deal may still emerge from time to time, Reddin says. But don’t expect those to purely involve aggregate assets.

“You’ll still see some large deals but likely including cement, ready-mix and asphalt,” he says. “There’s just not that many of these Aggregates USA or Bluegrass deals out there. When you drop down into the local or regional family-owned or influenced business, you will likely find more vertical integration – that’s the makeup of our industry.”

Some of those family-owned businesses envisioned selling in 2006 or 2007, before the recession inhibited their ability to effectively sell, Reddin adds. Now may be their second chance.

“We have good alignment of residential and commercial markets, the FAST Act, the promise of infrastructure spending, the stock market, low interest rates, and the fact that the U.S. is attractive for investment relative to other markets around the globe,” Reddin says. “This is what we’ve waited for over the better part of a decade. It’s right for this activity. The buyers are back, and they’ve deleveraged their balance sheets.”

The window to strike a deal will only be open so long, though.

“Right now if you look at our forecasting along with the Portland Cement Association’s and Dodge [Data & Analytics’], everything is still looking pretty good three years out,” Reddin says. “A lot of people are forecasting out to 2021 and it still looks OK. But the minute the third year in the forecast starts to look bad, there will be a belt tightening.

“Given the severe downturn we had – even though it’s coming on a decade ago – the battle scars remain visible,” he adds. “When we start to see a softening of the outlook, you may see a significant knee-jerk pullback. [Buyers] will overreact toward conservatism. Right now, they’re probably stretching their valuations because of their optimism.”

But if progress isn’t made in Washington to seriously enhance the nation’s infrastructure, as well as reform health care and the tax code, the window may close on making a deal.

“From a business development perspective, this is the best time in nearly a decade because you have visibility for your forecast period that looks good; companies that want to exit; and boards of directors that want to invest,” Reddin says. “It’s perfect. But I think there is a window, it cycles and then it comes back again.”

As the supply of sellers increases, buyers will be more selective.

“The investor hierarchy of investment preferences remains material supply first, whether that is cement, aggregates or asphalt,” Reddin says. “The downstream uses of the material, asphalt paving and ready mixed concrete will remain in favor to the extent that it fits the vertically integrated market. The more contractor-intense businesses have a smaller buyer pool; however, those buyers are active and remain bullish on increased public-private partnership activity and are aggressively pursuing acquisitions”.

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