November 13, 2011
Company financials reflect disappointing market conditions
The number of merger and acquisition transactions in North America was up 13 percent for the three quarters ending Sept. 30, 2011, while the total value of these transactions was up 28 percent from the prior year. The construction materials sector, on the other hand, has been flat in 2011, with small- to medium-sized deals dominating.
The construction materials sector is dependent on the housing market and highway funding. Both continue to be major disappointments. Housing construction put in place peaked in 2006 at a level of approximately $435 billion and is expected to be slightly more than $110 billion for 2011. This, together with the lack of a long-term federal transportation bill and troubled state departments of transportation, has led to a significant drop in stock prices for the sector’s publicly traded stocks in recent months. At the end of September, the construction materials peer group members were trading at nearly 50 percent of their 52-week highs, while, at the same time, the market indexes were only off by approximately 15 percent.
For example, Cemex stock fell to a 13-year low on concerns of its ability to meet debt obligations. At the end of September, Cemex shares had lost three-quarters of their value. Trading in shares of Cemex was temporarily suspended on Oct. 2 after the shares fell 15 percent from their previous close. Cemex’s debt is now 7.2 times the company’s EBITDA at the end of June. The peer group for construction materials producers has a median Debt/EBITDA ratio of approximately 4.6 times, which is up from only 2.0 times in 2006. The company is expected to sell $1 billion in non-core assets to appease creditors.
Lafarge continues to divest of its assets in the United States and is expected to sell its Calera, Citadel, and Lakeshore operations in Birmingham, Ala., to Vulcan Materials Co. Earlier this year, Lafarge realized $760 million from the sale of assets to Cementos Argos. That transaction consisted of 79 ready-mixed plants in Georgia, Alabama, and Louisiana, cement plants in Harleyville, S.C., and Roberta, Ala., plus an Atlanta-area clinker grinding mill and six cement terminals. Aggregate Industries, a subsidiary of Holcim, is rumored to have purchased Ennstone, Inc. of Virginia. Ennstone operates three sand and gravel pits, one limestone quarry, and 17 Ready Mix Concrete Co. plants.
The House Committee on Transportation and Infrastructure has instructions to find the resources for a larger surface transportation reauthorization bill, but one that will not include an increase in the gas user fee. The committee will be working on a $350 billion, six-year surface transportation bill. This is up from the $230 billion, six-year bill outlined by the committee in July that would have represented a 34-percent cut from current funding levels. The committee will have to find about $100 billion in additional resources. This development boosts optimism for increased funding, which had recently hit rock bottom. The Senate Appropriations Committee has approved a draft FY12 appropriations bill for the Department of Transportation and Housing and Urban Development (THUD). The Senate bill maintains current funding levels for program obligation limitations of $41.1 billion for highways. This news provides optimism for highway funding, which is encouraging for merger and acquisition activity.