Which way for Cemex?

Cemex’ current debt level remains worryingly high. Recent speculation has emerged about the group not being able to meet financial covenants at the next year-end and being forced to accept more stringent terms and conditions from its creditors.

The 2007 acquisition of Rinker proved one deal too many for Cemex and the company was obliged to sell its Australian assets to Holcim in 2009 to reduce its debt mountain.  

And following the subsequent exercise of the put option held by the privately-owned Ready Mix USA, Cemex has not only had to pay out some US$360m, but is also having to consolidate some US$28m of the former joint-venture's debt as it takes the Demopolis, Alabama, and Chinchfield, Georgia, cement works back into full ownership along with some of 187 batching plants, 10 quarries and a number of block plants.

Turning to company’s first half 2011 results, turnover improved by 9.7% to US$7461.9m while the EBITDA came off by a further 4.0% to US$1132.0m but the pre-tax loss was 2.2% lower at US$460.6m. In spite of a 3.5% reduction in the net debt to US$17,753.0m, the gearing level was 4.8% higher at 112.3%.

Turnover and profits were ahead in Mexico and in Northern Europe, during the first half of the year, and accounted 55.4% of group turnover and for 67.3% of EBITDA. In the United States, turnover declined by 8.9% to US$1126.0m and the EBITDA loss rose from US$6.8m to US$70.2m as volumes declined across the board. Profitability in the Mediterranean area, South America, Central America and the Caribbean as well as in Asia declined, but remained positive.
 
In this difficult market environment, Cemex' plans to dispose of around US$1bn of assets by the end of 2012 to reduce debt may be seen as too little too late, especially as only some US$180m of these disposals have been scheduled for this year. The plan is to sell non-core assets, mostly real estate assets such as quarries to raise additional cash. Some swapping of assets with competitors to improve the short-term return is also under consideration. The United States is currently the largest single problem area, but Cemex expects a return to profits there in 2012.   

Having failed to conclude the earlier-agreed disposals of the Austrian and Hungarian businesses, Cemex may now indeed be forced to sell some substantial assets with promising potential. Again, Holcim appears a likely potential buyer of several of these. Holcim is not presently directly active in the relatively dynamic Polish market, where HeidelbergCement and Lafarge are the two leading operators, followed by CRH and Cemex being in fourth place. Two other countries where the Cemex assets would fit well with Holcim's are in Germany and, on a smaller scale, Latvia. There are plenty of potential buyers for the Latvian business, which exports the majority of its output, as only HeidelbergCement is likely to be ruled out on monopolies grounds. Lafarge could also be seen as a possible buyer of the German business, but would Lafarge be willing to invest the necessary money in that market?

In Europe, the important Spanish market, where Cemex is number two, will remain difficult this year and next. The British market appears to be stabilising at lower levels and in France, in spite of its strong second position in ready-mixed concrete, all the cement is bought in from competitors. The operations in Spain, Britain and France are unlikely to be saleable at an attractive price in the current environment. In the rest of the Mediterranean Basin, the outlook for Egypt is uncertain and there is a need to find new export markets for the production capacity that exists in Croatia.

Ultimately, Cemex is at a critical stage in its history, fighting to reduce its debt amidst a turbulent global economy and particularly tough market conditions. Shares are now at a 13-year low, and although the company recently met an important repayment target, which will allow the company to avoid an increase in interest rates that would otherwise have taken effect at the year end, investors and creditors will be looking hard for evidence of initiatives that will boost revenues and ease its debt at the forthcoming third-quarter results announcement on 26 October. It is quite likely that a further announcement about asset disposals will be made at that stage.

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