February 1, 2011
Looking through the rear view mirror
It has been a wild ride for the AggMan Index (and the industry) in 2010, and it is another year that many are happy to see in the rear view mirror. Starting the year at 122.6, the Index dropped in the first quarter, hit a peak in the early second quarter (peak for the year was 126.0 on April 26), dropped to a low point in the late third quarter (bottom was 79.3 on Aug. 24), and ultimately rallied in the fourth quarter to end the year at 104.4. After all the gyrations, the Index ended down 14.6 percent and left most of the industry staring into the crystal ball to try to figure out their strategy for the future. While the S&P 500 had some similar trends, the broader market had a better year and ended on a high note that was up nearly 12 percent in 2010. Given the difference in results, it could be easy to be negative on the construction materials sector. However, the industry is headed into 2011 on better footing, as the worst seems to be in the past and some end markets have shown signs of stabilization during the year. At this point, the positive market valuations were based on optimism around expectations of what could happen while the industry was still experiencing declining market volumes and uncertain funding dynamics. As we head into 2011, the market valuations relative to the fundamentals are better aligned and the Index is on a four-month positive trend. While much needs to be settled on key items like long-term government highway funding, the industry is in a better position to continue its positive, albeit slow and steady, valuation trend in 2011.
The year of 2010 ends quietly
Merger and acquisition activity ended the year on a dull note. The momentum created earlier in the year, due to an expected improvement in the economy and construction materials sector, did not gain steam. The lack of major tax law changes took off the pressure of getting deals closed by year-end as sellers realized that capital gains rates would remain the same.
As we close out 2010 and move into 2011, we find some good and bad news for merger and acquisition activity. On a positive note, there is an ever-growing supply of good companies that would like to sell. The demographics are favorable for the supply of sellers to remain strong for the near future as the United States remains a highly fragmented market with needs for ownership transfer every generation. Additionally, the buyers are returning to the market after spending the last two years working on their balance sheets and being very selective on the acquisition front. As such, the supply and demand dynamics look favorable for the next few years.
To complement these supply and demand dynamics, the system needs more “grease.” This grease will come from a combination of improved operating results, better access to capital, and a rationalization between buyer and seller price expectations. There is concern that backlogs, and the margin in these backlogs, are down as we enter 2011. This is a concern for the outlook on operating results in 2011. Many are looking for 2011 to be flat, or show slight improvement, while pinning their hopes on 2012 or 2013. Deal activity will pick up significantly when these signs of improvement start rolling in.
Oldcastle Materials has purchased the asphalt and construction business assets of MAC Construction, Inc. in Buchanan County, Va. The acquisition is a bolt-on to Oldcastle’s W-L Construction & Paving business.
Summit Materials, LLC has acquired RK Hall Construction, Ltd, Buster Crushed Stone, and associated companies (collectively “RK Hall”), based in Paris, Texas. RK Hall is an aggregates, asphalt production, paving, and construction business with operations in northeast Texas, southeast Oklahoma, and southwest Arkansas. RK Hall will become part of Summit’s western platform in Utah.
Quality Concrete Group, LLC, has acquired ready-mixed concrete producer Baton Rouge Ready Mix Inc. from Occla LLC. Quality Concrete Group, LLC was founded in 1979 and is based in Baton Rouge, La.
CRH America, Inc., a wholly owned subsidiary of CRH plc, successfully priced its fifth U.S. global bond offering consisting of 10-year and five-year notes raising $750 million. These proceeds will fund a cash tender offer for a portion of CRH America’s existing bonds and will be used for general corporate purposes. The capital raised enables CRH to extend its debt maturity profile and to expand its investor base.