Conditions in the US housing market will become a focus in the takeover battle for Rinker Group this week as the construction materials company provides its first major trading update since Cemex launched its hostile A$16.8 billion bid. Rinker is set to report its profit for the half year ended September 30 on Thursday and any commentary around trading conditions in its key markets of Florida, Arizona and Nevada is set to draw intense scrutiny.
Cemex has made the deteriorating conditions in the US housing market, particularly in Rinker’s key states, a central plank supporting its $US13 (A$17) a share bid. The Latin-American company’s bidder’s statement pointed to the fact Rinker’s business is heavily exposed to residential construction in three underperforming US states.
The picture has already been filled out by the recent quarterly reports of other construction materials groups including Rinker’s key comparators, Vulcan Materials and Martin Marietta. These companies have highlighted volume weakness in the face of declining housing activity but pricing has remained strong. This has bolstered confidence among analysts about the outlook for Rinker, despite the tough conditions it is facing.
"This pricing momentum and associated industry discipline could continue, with all majors citing strong prospects for additional price increases," Credit Suisse said in its latest note on Rinker. However, the broker also noted that both Vulcan and Martin Marietta downgraded their 2006 profit guidance by 1 per cent and 4 per cent respectively.
Rinker has previously said buoyant conditions in infrastructure and commercial construction had offset the associated pain in housing. Investors will be seeking specific data to show the extent to which this is occurring.
Rinker has provided guidance for earnings per share to be in the range of US86¢ to US92¢ in the year to March 2007, up 13 per cent to 21 per cent over 2005-06 before one off gains and a recent capital return.
With a lack of visibility on how deep and enduring the current downturn in US housing will be, Cemex’s offer could start to look a lot better if the decline in this market gathers pace. If Rinker comes out with any downgrades between now and the end of the financial year, the current view held by many investors that $17 is inadequate might begin to change.
The timing of the Cemex bid has been viewed as opportunistic, with a lack of clarity over the outlook making it an opportune time to capitalise on any uncertainty.
But Cemex is also seen to have taken a risk making such a large play at this point in the building cycle. This was a point Deutsche Bank drew attention to in a recent note on Cemex: "Our present neutral stance towards Cemex has been largely based on the direction of US cement and concrete volume and pricing trends, primarily due to the weakness that has materialised in residential construction."
By the end of the week Cemex vice-president Juan Pablo San Agustin flew out of Sydney with the viability of the offer in doubt. He even failed to secure a meeting with the Rinker board. Rinker chairman John Morschel denounced the $17-per-share offer as hostile, opportunistic and highly conditional. He added it undervalued the company, which saw its shares rocket to easily eclipse Cemex’s bid. Institutional shareholders and market analysts appear to have agreed.
Virtually all said Cemex, the world’s third-largest cement maker, would have to raise its bid to at least $19 or $20. Some said it might have to go as high as $23. Rinker shares closed up 10c at $18.59 on Friday -- up 30 per cent from a week earlier.
Undeterred, Cemex representatives embarked on a two-day roadshow to spruik the takeover benefits but had little to show for it by the end. Most notably Cemex met with Perpetual Investments, Rinker’s biggest single stakeholder with 10.5 per cent. Perpetual, with enough stock to stop Cemex reaching a crucial 90 per cent threshold, knocked back the bid as insufficient because it lacked a premium for control. So the ball is squarely back in the court of Cemex. It has a record of leaving initial bids intact but that does not preclude it from upping the ante this time.
Speculation has now turned to whether another bidder will enter the fray or if Rinker may try to merge with one of its American or European rivals to stymie Cemex. It could also announce large capital returns to keep investors happy.
Regardless, the market will soon have a better view of Rinker’s performance in the US, where about 80 per cent of its revenue originates. Due out on Thursday, the figures should reflect the bursting of the American housing bubble, which has forced down Rinker’s share price from a high of $21.44 six months ago. Rinker, maker of well-known Readymix concrete, is one of the world’s top-10 heavy building materials groups with major markets in Florida, Arizona and Nevada. Almost half its cashflow comes from Florida, which is tipped to suffer a 20 per cent fall in housing starts this year.