Cemex Should Have Financed ‘More Conservatively’:

Cemex Should Have Financed ‘More Conservatively’:
Published: 03 November 2009

Cemex SAB Chief Executive Officer Lorenzo Zambrano is confident his $14.2 billion acquisition of Rinker Group Ltd., which almost pushed the Monterrey, Mexico- based cement maker into default, will pay off over time.

Zambrano, who saved his company with an August agreement to refinance $15 billion of bank debt, is optimistic even after his company’s sales plunged 31 percent in the first nine months of the year. Cemex’s debt rating was raised by Standard & Poor’s this month to B, five levels below investment grade, from a rating of B- assigned in March.

“The mistake was not to finance the Rinker acquisition more conservatively,” Zambrano said in an Oct. 30 interview in Monterrey. “You’ll see. It will pay off. Believe me.”

Cemex tripled its debt in July 2007 to buy Rinker, which drew more than 80 percent of its sales from the U.S., just as a construction boom in the country was turning into a bust. Then, when credit froze worldwide in 2008 following the collapse of Lehman Brothers Holdings Inc., banks refused to roll over short- term loans Cemex used to finance the acquisition. In March, the company failed to sell a $500 million bond.

Zambrano, who became Cemex’s CEO in 1985, said he has been told he will fail after every big acquisition he has made: Two Spanish cement makers in 1992, Houston-based Southdown Inc. in 2000, U.K.-based RMC Group Plc in 2005, and now Rinker. He has proved critics wrong in the past and is working to defy them again, he said.

“I know that a lot of people outside Cemex thought that we wouldn’t make it,” the 65-year-old Zambrano said, sitting in a conference room adjacent to his private office. “I was surprised because they keep underestimating us again and again and again.”

Repaying Banks

Zambrano is seeking to repay banks as quickly as possible and free Cemex from an agreement that limits capital expenditures and requires debt-holder approval for acquisitions. Since September, Zambrano has raised about $3.5 billion from the sale of shares and assets to pay debt. Cemex will issue a bond convertible to up to 400 million Mexican shares and is considering selling a long-term bond within six months to pay more debt, he said.

“We are going to refinance some of the bank debt to a longer-term schedule,” he said.

The company may even consider non-cash acquisitions if the transaction is right and debt holders approve, Zambrano said.

Turning Cemex around may take time, said Christopher Palmer, who oversees about $5 billion as head of global emerging markets at Gartmore Investment Management Ltd. in London. In the third quarter, sales fell for all Cemex markets around the world, led by a 38 percent drop in the U.S. and a 41 percent decline in Spain.

‘Wake-up Call’

“The third-quarter earnings of Cemex were sort of a wake- up call that this is a company in the very early stages of stabilizing” worldwide, said Palmer, who owns Cemex shares.

The company will have to use most of its cash profits to pay debt at least until 2013, said Gonzalo Fernandez, a Mexico City-based analyst with Banco Santander SA. That will give companies such as Holcim Ltd. and Dublin-based CRH Plc an advantage in buying assets during the global economic slump. Switzerland-based Holcim bought Cemex’s Australian operations for $1.7 billion in October.

“Clearly CRH and Holcim, who always had a more conservative strategy, are the winners,” Fernandez said. Cemex “becomes a story of de-leverage, which from the equity point of view is positive.”

Under the bank agreement, Cemex must pay debt of $4.8 billion by the end of 2010 and another $2.8 billion by December 2011 or face higher interest rates. At the end of September, Cemex had total debt of $17.58 billion, not including about $3 billion of perpetual bonds.

U.S. Market Recovery

The U.S. market won’t recover its 2006 level of cement volume for another decade and it could take Cemex five years or more to post cash flow at the 2006 level of the company combined with Rinker, said Zambrano, whose grandfather started the company at the turn of last century. Spain will take even more time to recoup, he said.

Once the U.S. begins to recover, growth will be fast because it’s starting at such a low level, Zambrano said.

“The U.S. is our new super tiger of growth,” he said. “From where we are right now and where we’re going to be in five years, the growth is going to be fantastic.”

The company has become more “agile” after cutting $900 million of annual costs by firing workers, closing plants, using more video-conferencing and charging employees for coffee. Zambrano is working to convert the whole company to one information-technology platform that helps employees use new networking systems to share ideas.

Source: Bloomberg