The Outlook for 2012 Remains Flat
The 2012 outlook for construction materials shipments, highway and bridge construction, and residential construction remain flat with no significant growth expected until 2014. This is obviously disappointing for all in the industry; however, it appears to be an opinion shared by most producers.
According to the American Road & Transportation Builders Association, the highway and bridge construction market is expected to contract by 6 percent, to $72.6 billion in 2012, from an estimated $77 billion in 2011. The Portland Cement Association has revised its forecast for cement consumption to increases of 1.1 percent for 2011, 0.05 percent for 2012, and 7.4 percent for 2013, which is approximately half of its previous forecast. McGraw-Hill, in its 2012 Dodge Construction Outlook, is predicting that overall U.S. construction starts for 2012 will be flat.
The main factors driving the decline in highway and bridge construction include the winding down of infrastructure investment under the American Recovery and Reinvestment Act (ARRA), continued weak growth in the U.S. economy, state and local budget deficits, and a federal highway program that has not been reauthorized since September of 2009. The residential homebuilding sector is expected to remain flat or experience modest gains due to huge levels of unsold new homes, lack of jobs, and concerns about further declines in home values.
Deal activity in the construction industry will follow this trend and not show any significant increase until the outlook improves.
Recent transactions and activity
Oldcastle Materials, Inc. acquired the assets of Powers Stone, Inc. in Susquehanna County, Pa. The company consists of three aggregate quarries and expands Oldcastle’s presence in a market that is benefiting from growth associated with the natural gas development from Marcellus shale formations.
Martin Marietta Materials, Inc. made a hostile offer in December to acquire Vulcan Materials Co. for $4.8 billion in stock. Including the assumption of Vulcan’s $2.7 billion in net debt, the deal is worth $7.5 billion. The deal is priced at 24 times EBITDA based on Vulcan’s EBITDA of about $306 million in the past 12 months. According to Martin Marietta, the deal would save up to $250 million in costs from bulk purchases and duplicative operations leaving the deal closer to 13.5 times adjusted EBITDA. Prior to the deal announcement, Vulcan’s market value had fallen 63 percent from its peak of almost $11.8 billion in 2007. The Board of Vulcan Materials has unanimously rejected the offer.
George H. Reddin is a principal in FMI’s Investment Banking practice. He can be reached at 919-785-9286 or at firstname.lastname@example.org.
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