Fitch ratings on Cemex deal

Fitch ratings on Cemex deal
Published: 28 September 2004

Fitch ratings discusses Cemex deal

Fitch Ratings, New York has placed the ’BBB’ senior unsecured foreign currency and local currency ratings on Cemex and of its wholly owned subsidiary Cemex Espana on Watch Negative following the announcement that the company intends to purchase RMC, a producer of ready-mix concrete, aggregates, and cement, based in the UK and with operations in 26 countries, primarily in Western and Eastern Europe and in the US.

RMC is the world’s largest producer of ready-mix concrete and the 10th largest cement-maker. If the acquisition is completed, the resulting company will become the second largest cement producer based on revenues and the largest ready-mix producer in the world.

Cemex’s acquisition of RMC is leveraging and will pressure credit fundamentals over the short to medium term. The acquisition will be financed with debt in the form of bank facilities that have been committed by Citigroup and Goldman Sachs. On a pro forma basis, leverage as measured by the ratio of debt/EBITDA is expected to increase above 3.0 times (x) and outside Cemex’s current financial target of 2.7x or less. Interest coverage should remain above 5x due to the company’s low cost of funding. Pro forma credit statistics are expected to remain consistent with the investment-grade rating category. Fitch expects the acquisition debt to be repaid over the next few years from free cash flow resulting from combined operations and anticipated synergies. Nonetheless, Cemex may face challenges integrating this large and multinational entity, which could delay projected improvement in credit protection measures.

Strategically, the acquisition of RMC is positive. It should improve CEMEX’s operating profile by reducing the proportion of EBITDA sourced from non-investment-grade countries, as well as the proportion of EBITDA derived from Mexican operations, which would drop from one-half of 2003 EBITDA to roughly one-third. The acquisition would reduce the volatility of cash flows of consolidated results as it provides further geographic revenue diversification to CEMEX’s existing operations. The assets of RCM are mostly located in areas that strategically fit and complement CEMEX’s existing assets, enhancing its position as an integrated cement player. The acquisition would turn CEMEX into the largest ready-mix producer in the world and an important player in aggregates, complementing the company’s strong business position in cement.

At June 30, 2004, CEMEX had total debt of US$5.3 billion and estimated 2004 EBITDA of US$2.4 million. RMC has outstanding debt of approximately US$1.5 billion and generated EBITDA in excess of US$800 million during 2003.