Debt concerns driving asset sell-offs among European players

Debt concerns driving asset sell-offs among European players
Published: 27 May 2011

FCC’s plan to sell its US cement subsidiary Cementos Portland Valderrivas is part of the Spanish construction company’s ongoing efforts to protect its bottom line from continued domestic weakness. While increasing international exposure has bolstered the performance of numerous Spanish construction players over the past 18 months, Spain’s moribund construction sector continues to weigh heavily on company balance sheets. Companies such as FCC and domestic rival OHL are among those seeking to cut debt through the offloading of non-core assets, with Latin American players among those keenest to snap up a bargain.

It must first be noted that - while the planned cement business sale may not be the only divestiture made by FCC, as it seeks to cut its US$11.8bn net debt - the company is by no means struggling. Indeed, FCC has been among the Spanish construction majors to have achieved significant success in its efforts to offset domestic weakness through leaning on international markets - particularly the Americas. The company’s winning of the EUR1bn (US$1.4bn) contract for the Panama metro concession in 2010 is indicative of this trend, and highlights the potential for Spanish companies in the region. Moreover, the company’s Q111 performance brought a rise in net profit of 9.8%, and the news that the group had boosted its percentage revenue from international operations from 40% in Q110 to 46% in Q111.
Nevertheless, net debt remains high. Highlighting this debt burden is the company’s low interest coverage ratio of 2.5, which underlines the unhealthy relationship between FCC’s earnings before interest and the interest on its debt expenses. Given that a ratio of 1.5 or below would bring into question the company’s ability to meet its interest payments; the sale of non-core assets would seem a prudent, if not essential, measure. Indeed, its US cement business, which produces more than 2mn tonnes annually and is valued at between US$600mn and US$700mn (according to the FT), would provide a useful source of cash. Importantly there is also, reportedly, strong interest in the asset from a number of Brazilian players, including CSN, Votorantim and Camargo Correa - all keen to establish a presence in the large US market. OHL meanwhile, has also signalled that it plans to sell its Mexican hotel assets once it has sealed the sale of its environmental unit, Inima, this year.
Corporate Financing Week notes that the FCC’s planned asset sale reflects not only a growing trend among indebted Spanish construction companies, but also among European and North American players; underpinned by weak construction activity in core markets and high debt. This has opened the door for emerging market companies to gain access to markets that were previously closed to them. South American building materials companies in particular have shown significant appetite for expansion of late, not only within their own neighbourhood but further afield. Most recently, this was illustrated by indebted French cement major Lafarge, which agreed to sell some of its US assets to Colombian competitor Cementos Argos.

Source: Corporate Financing Week