October 1, 2010
AggMan Index: Optimism Gives Way to Reality
As we come out of the busy construction season, the optimism for a recovery in activity that existed in March and April has given way to the reality of the markets. In recent weeks, several of the national and multi-national construction materials companies have released earnings and revised, downward, their forecasts for the remainder of the year to reflect the continued slowness in activity. As a result, the market has priced in lower expected earnings for the industry, and this has taken its toll on valuations across the industry. For the month, the AggMan Index dropped to 83.2, which is the lowest point in the index since March 2009. While the construction materials sector has been hit hardest — given the direct link to funding (or lack thereof) — the broader markets continue to be under pressure as well, as investors try to weigh the economic data with the mounting concerns over the pace of recovery. This uncertainty has manifested itself in a stock market that has been choppy and fluctuates on every piece of financial news. Overall, the S&P 500 has been more stable than the AggMan Index, and the broader market has largely been in a trading band all year that ranges from the mid 90s to the mid 100s. The current S&P 500 index is at the bottom end of that range at 95.2 as current sentiment is more cautious than optimistic. The coming months will be interesting as we head into election season — the results of which will likely have a material impact on the funding dynamics for the industry, taxes, and the overall view of the direction coming out of Washington to drive the economic recovery. As we watch the elections, there will be lots of rhetoric that will be positive for the industry, as shown by Obama’s recent speech calling for $50 billion in federal funds for new and expanded roads, railways, and runways. As the saying goes, the proof will be in the pudding as to what the future will bring on the funding front but, for now, we are likely to remain in this lower trading band as the market and industry wait for a true uptick in activity.
Divestitures and Private Equity Drive M&A
Global merger and acquisition (M&A) activity in the construction materials sector continues to be most active in emerging markets, where the growth opportunities and competitive dynamics make for more attractive investment opportunities. M&A activity in North America remains very slow and dominated by small deals.
In August, Summit Materials, LLC completed its fourth acquisition of the year, acquiring Kilgore Paving and Maintenance, LLC and Harper Ready Mix Co. At the same time, Kilgore Paving and Maintenance, LLC and Harper Ready Mix Company have merged to form Harper-Kilgore, LLC. Kilgore Paving reported revenues of $50 million for the year ended Dec. 31, 2009.
According to CapIQ, there have been 32 M&A transactions year-to-date in the construction materials sector, which includes cement, aggregates, ready-mixed concrete, and asphalt business activities. These transactions have been dominated by construction aggregates deals (nearly 41 percent of all deals) and vertically integrated deals (more than 28 percent of all deals).
The demand for acquisitions of construction aggregates-based companies does not come as any surprise. Significant barriers to entry and the typical oligopoly competitive structure have resulted in steady interest in these opportunities throughout various stages of economic cycles. Interest in the downstream businesses of ready-mixed concrete and hot-mix asphalt tend to be more sensitive to the near-term economic outlook.
The majority of the deals announced this year are very small, representing bolt-on deals with local strategic buyers. Of the 32 transactions reported by CapIQ, 14 disclosed the purchase price specifics. These deals totaled just over $648 million in transaction value. Removing the two largest deals (Cemex divestitures to SPO Partners for $430 million and Patriot Transportation for $90 million), the average of the remaining 12 deals is only $11.5 million. To drive the point home even further, the bottom half of the deals with reported transaction values averaged only $1.4 million in value.