George Reddin

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.

At the end of October, the outlook for construction materials remained cloudy. The Federal Transportation Bill was funded until March of 2012; however, the overall outlook for federal and state funding remained gloomy. President Obama was promoting the American Jobs Act without much success. There appeared to be some light at the end of the tunnel in Europe until Greece decided to seek a referendum on the debt plan. Third quarter earnings reports were coming in with year-to-date shipments of aggregates below 2010 levels. Major companies were beginning their budgeting and business planning efforts for 2012, and the outlook was not positive. These factors continue to keep a damper on merger and acquisition activity in the construction materials sector.

Recent transactions

Aggregate Industries completed its acquisition of Ennstone, Inc., a vertically integrated construction materials company headquartered in Falmouth, Va., with ready mix, sand and gravel, and limestone. (See story below.)

Martin Marietta Materials, Inc. and Lafarge North America Inc. have agreed to an asset swap. Under the terms of the agreement, Martin Marietta Materials, Inc. will receive Lafarge’s aggregates quarry sites, ready-mixed concrete and asphalt plants, and a road paving business in the Colorado Front Range and Wyoming markets. In exchange, Lafarge will receive aggregates sites located along the Mississippi River in Mississippi, Tennessee, Kentucky, and Missouri, as well as distribution yards along the lower Mississippi River, associated barging equipment, and a cash payment.

Other news

Cemex has announced that it will reduce its debt by the end of the year to comply with debt agreements. The company has promised to cut debt to no more than 7.0 times earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of the year. At the end of September, Cemex had debt amounting to 7.2 times EBITDA. Asset disposal will be a major part of the strategy to reduce debt. Cemex raised U.S. $80 million in asset sales during the first nine months of this year and expects to raise an additional U.S. $100 million to U.S. $200 million during the fourth quarter, with total proceeds from asset sales reaching U.S. $1 billion by the end of 2012.

Aggregate Industries Ennstone buyout finalized

Aggregate Industries U.S., part of the Holcim Group, on Nov. 1 closed its asset purchase agreement with Ennstone Inc., a vertically integrated construction materials company headquartered in Falmouth, Va.

“The closing of this transaction is a good fit strategically for Aggregate Industries, in particular, Aggregate Industries’ Mid-Atlantic business, and will maximize value for our stakeholders – employees, customers, and shareholders alike,” Bernard Terver, president and CEO of Aggregate Industries U.S., said in a press release. “In addition, this transaction will enable Aggregate Industries to strengthen its presence in the region.”

– by Tina Grady Barbaccia, News and Digital Editor

DK Aggregates is located near Nicholson, Miss., in the Stennis Space Center Buffer Zone (no development is allowed in the Buffer Zone, but natural resource harvesting is allowed, including mining, timber, farming, etc.). The current owner acquired the property in 2003 and invested more than $3 million in infrastructure and equipment. The operation employs between 10 and 30 people depending on projects in house. Prior to the acquisition, the property had been harvested for timber and used for corn farming. 

According to third party drill reports in the information book provided by Equity Partners, the proven gravel reserves on the property are approximately 18 million tons, and proven frac sand and other sand reserves are 30 million tons. The drillings supporting these estimates were done on only 500 acres of the property. Another 600 acres is believed to have similar reserves as described above. DK’s property also includes an additional 600-acre area suitable for a landfill, and some of the preliminary excavation and permitting was completed for that purpose.

John Neuner is the managing director at Harris Williams & Co. He can be reached at 804-648-0072 or jneuner@harriswilliams.com.

As this is written, we are in an interesting valuation period for the sector. The public companies in the sector are in the midst of releasing their fourth quarter 2009 results, which, as expected, continue to reflect the pressures across all markets and segments. While the residential market should show some moderate increase in housing starts in 2010, the commercial market continues to decline and is expected to be under pressure for the foreseeable future. To offset these markets, many had hoped the public works segment with carryover stimulus dollars would provide some support in 2010. Unfortunately, this segment of the industry is also in a period of limbo as we wait to see if/how the politicians in Washington, D.C. can settle in on a long-term transportation bill that gives more visibility than the current month-to-month process. With these various factors at play, it is not a surprise that the AggMan Index encountered some turbulence throughout the past month and moved from 128.1 as of year-end 2009 to a monthly peak of 131.8 mid-month to a low at month end of 119.9. Given the “noise” in the industry, these fluctuations seem likely to continue in the near term as the industry looks for a clearer long-term picture, but the long-term trend will continue to show an increasing index.

Deals pick up and credit markets show improvement

George H. Reddin is a principal in FMI’s Investment Banking practice. He can be reached at 919-785-9286 or at greddin@fminet.com.

The fourth quarter of 2009 and the beginning of 2010 have seen signs of increased mergers and acquisition (M&A) activity in the construction materials sector, as well as overall increased lending activity. These events have many optimistic about overall deal activity for 2010.

Strategic buyers continue to dominate deal activity in the United States; however, distressed situations and sellers that waited out the last 18 months and have a compelling need to sell should also add to the activity.

Oldcastle Materials Inc. led the way in the fourth quarter with four transactions. Oldcastle’s APAC operations completed three acquisitions, two in Missouri and one in Texas, with combined annualized sales of $159 million. In November, Oldcastle acquired Hilty Quarries Inc., an integrated aggregate, asphalt, and construction business based in Clinton, Mo. In December, Oldcastle acquired selected aggregate and asphalt assets in central and eastern Missouri from Lafarge and acquired Wheeler Companies’ six asphalt plants and eight ready-mixed concrete plants in Texas. In December, Oldcastle’s Staker Parsons division acquired Burdick Paving Corp., an integrated aggregate and asphalt construction company.

In January, Summit Materials announced the acquisition of Hinkle Contracting Co. based in Paris, Ky. Hinkle Contracting is an aggregate, asphalt, paving, concrete block, and construction company operating 12 aggregate and 17 asphalt facilities. Summit Materials recently secured loans totaling $174.3 million for general corporate purposes and to help finance the $149 million acquisition of Hinkle Contracting.

Conditions in the loan markets improved considerably in the fourth quarter with new issuance reaching $25.8 billion, according to Thomson Reuters LPC. As shown in the accompanying chart, this is the highest level since the third quarter of 2008 and is up 37 percent from the fourth quarter of 2008. Additionally, there is an increased level of lending to support M&A activity, providing the fuel for both strategic and financial buyers to pursue acquisitions.