March 1, 2010
AggMan Index: Turbulent Times
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
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.