Merger-and-acquisition activity continues in the aggregate industry

By , and |  December 16, 2016

Merger-and-acquisition activity in the third quarter included several noteworthy transactions.

In August, Colombia-based Cementos Argos SA agreed to purchase HeidelbergCement’s Martinsburg, West Virginia, cement plant and eight related terminals for $660 million. The divestiture by HeidelbergCement is the final transaction required by the U.S. Department of Justice in its approval of the Heidelberg/Italcementi transaction announced in July 2015. The transaction is expected to close in the fourth quarter of 2016.

While the Cementos Argos transaction marks the final required divestiture following the completion of Lafarge/Holcim and Heidelberg/Italcementi, the competitive implications of those transactions are anything but finalized. FMI expects several transactions to follow in the wake of these deals, as larger companies come to grips with new production capacity, distribution routes and changing competitive pressures.

As we have discussed in prior articles, the LafargeHolcim merger and the Heidelberg/Italcementi merger have driven more than two dozen cement plants to new or merged owners in the United States.

Also in the third quarter, Cemex agreed to sell its Fairborn, Ohio, cement plant and a terminal in Columbus, Ohio, to Eagle Materials for about $400 million. The Cemex deal is the company’s second in the U.S. over the past six months conducted in an effort to cut its debt by more than $3 billion over the next two years.

In October, the company announced it was considering the sale of its 23 percent stake in Grupo Cementos de Chihuahua SAB (GCC), and in May the company announced a sale of its Odessa, Texas, cement plant, two cement terminals and a building materials business to GCC.

Both the Cemex and Heidelberg transactions are driven by longstanding trends within the global materials market. In the mid 2000s, many international firms dramatically expanded through the use of debt and were subsequently challenged when the financial crisis struck in 2008. Debt-fueled expansion coupled with recession is anything but a recipe for success, and large international players have spent the years following the recession reworking their balance sheets and executing large mergers that have eliminated redundant overhead costs and maximized other synergies.

Public company performance

While larger international players have focused their efforts on right-sizing their balance sheets and executing megadeals, FMI’s Construction Materials Index (CMI) companies with a U.S. focus have performed exceptionally well. Since the first quarter of 2013, the U.S. CMI companies have seen average aggregate revenue growth of about 2.8 percent annually while aggregate earnings before interest, taxes, depreciations and amortization (EBITDA) has improved by an average of 6.9 percent annually.

Martin Marietta and Vulcan Materials have been the largest contributors to this trend, but Summit Materials, U.S. Concrete, Eagle Materials and Granite Construction have all generated strong improvements in EBITDA performance over the past three years.

This trend continued in the third quarter. Summit Materials reported a 68.3 percent increase in second-quarter EBITDA versus second-quarter 2015, while U.S. Concrete and Vulcan Materials reported 51.2 percent and 40.7 percent increases, respectively, over the same time period. Overall, international firms exhibited flat to modest growth in second-quarter EBITDA vs. second-quarter 2015.

Overall, the CMI continues to outperform the Dow Jones Industrial Average (DJIA) and S&P 500 in 2016, increasing by about 19.8 percent since Jan. 1, versus 6.5 percent and 7.4 percent for the DJIA and S&P 500, respectively. On a 10-year basis, however, the CMI has ample room for growth, having grown only 12.5 percent in the 10-year period, versus 53.7 percent and 59.1 percent for the DJIA and S&P 500, respectively.

The broad effects of the Great Recession on the construction materials industry and construction industry were substantial, and many markets have yet to recover from their pre-recession highs. The winds continue to be at the backs of CMI companies in the United States.

Market growth drivers

The construction materials market has historically seen its fortunes entwined with both heavy highway spending and residential construction spending. The residential market has continued to perform well, with low interest rates, rising wages and improving employment prospects driving demand. Housing starts per capita have remained below their 50-year average for more than a decade, suggesting that despite the substantial rebound in housing markets, there is continued room for growth.

While the FAST Act does not dramatically expand highway-funding levels, it does provide a five-year window of funding certainty that enables long-term planning. When growth prospects in highway and residential markets are coupled with a stronger dollar and instability in foreign nations, additional merger-and-acquisition activity within U.S. construction materials markets is likely to result.

Additional transactions

Other notable transactions closed in the third quarter, including U.S. Concrete’s acquisition of Kings Ready Mix, Jenna Concrete and Nycon Supply Corp. – all of which are based in New York City. The transactions expand U.S. Concrete’s New York presence by six plants and well over 100 trucks.

George Reddin, managing director, and Scott Duncan, director, are with FMI Capital Advisors Inc., FMI Corp.’s investment banking subsidiary. They specialize in mergers and acquisitions and financial advisory services.

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