CRH builds up its cash pile but for what purpose?

CRH builds up its cash pile but for what purpose?
Published: 30 October 2009

CRH could be considering the sale of a US unit, Allied Building Products for as much as $1bn (€676m). Allied accounts for about seven per cent of group sales. The New Jersey-based distribution business had earnings before interest and taxes last year of US$55m on sales of $1.8bn. Such a sale could raise between €730m and €1.1bn for CRH, Goodbody Stockbroker analyst Robert Eason said in a note yesterday. "Overall, such a deal could make sense providing CRH gets a price that reflects mid-cycle margins and not trough margins," he said. Profits at Allied fell by almost two-thirds this year compared with last year as the recession bit into CRH’s US operations which account for more than half of profits at Ireland’s biggest company by market value.



A sale would leave CRH well placed to spend up to €5bn on acquisitions, having achieved a €1.2bn rights issue earlier this year -- the biggest in Irish history. "CRH could easily invest €4bn . . . and still be very comfortable on covenant and cash flow metrics," UBS said back in March. CRH chief executive Myles Lee indicated earlier this year that he was keen to snap up assets that will come up for sale at rivals who had overstretched themselves on the debt front ahead of the credit crisis. 



However, while cement is the most capital intensive of CRH’s activities, it will not necessarily be the main recipient of capital for acquisitions. Areas such as lighter materials and distribution, which are more fragmented, may well provide better acquisition opportunities in the current environment. That would also apply to concrete and aggregates, where the number of smaller potential deals are considerable. And the really big one is still out there as Anglo-American has stressed that Tarmac is still for sale. The sheer scale and improving stock markets would suggest a flotation, but CRH remains the only possible trade buyer in Europe.

The investment in converting the Podilsky cement works in the Ukraine to the dry process has been running somewhat more slowly in order to control costs but this major project should be completed by the middle of next year, well in time to benefit from an eventual market recovery. The expansion of the clinker and cement capacity at the Ozarow works in Poland has been delayed and will be re-activated once the economic picture in the region becomes clearer, though Poland is performing much better than neighbouring countries, and that applies to cement and aggregates demand as well.
 

Meanwhile trouble at Semapa in Portugal. The family of Pedro Mendonça de Queiroz Pereira controls 48.8 per cent of the capital and 51.2 per cent of the votes of Semapa. While Semapa has a 51 per cent interest in the cement, aggregates and concrete producer Secil, the shareholders’ agreement with CRH, which owns 49 per cent, stipulates joint control by the two shareholders. While Mr. Pedro Mendonça de Queiroz Pereira used to run Secil as a part of his private fiefdom, he has for the past five years been sharing control with CRH, which clearly has no intention of relinquishing control and would probably be happy to take full control, given the opportunity. 

In Spain, the continuing minority stake held by CRH in Uniland, on the other hand, gives CRH little influence in a company that is controlled by the leading Spanish cement producer. The eventual sale of the 26.3 per cent holding to Cementos Valderrivas is thus likely, but CRH would clearly like to acquire some assets in return. An obvious area of interest would be the North American interests of Cementos Valderrivas, consisting of Giant Cement Holdings, which in 2007, its record year, produced 2.25Mt of cement, but provide little overlap with CRH’s interests, as Giant Cement is relatively weak in concrete and aggregates. 



A further opportunity would be to buy out HeidelbergCement’s African cement interests. This was seen as good move for CRH earlier this year when HeidelbergCement was desparate for cash, but since it has restructured quite a sizeable slice of its debt and also raised a large slice of cash from existing and new shareholders, this option has now apparently receded – at best down to a minority stake in some individual West African units should HeidelbergCement face some further cashflow issues over coming months.