The arbitration tribunal to which CRH and Semapa took their dispute has ruled that Semapa was within its rights to demand the exercise of a call option on the 49% stake that CRH holds in the Portuguese-based cement joint venture Secil. The two parties are now obliged to complete the sale of the 49% stake in Secil for €574m within 120 days, though the time limit for the completion of the deal may be extended to 180 days. The price was set by three independent experts and is legally binding on both parties. While CRH was not a willing seller, given the recent sharp falls in stock valuations, with a historic EBITDA multiple of 4.4 times and an earnings multiple of more than nine times, the new situation looks fairly favourable for CRH in the context of the current depressed market conditions.

CRH’s gearing was a modest 33% at the end of last year, so the Irish multinational has plenty of financial flexibility and did not need the help of the Queiros Pereira family’s exercise of a call option. It was apparently brought about by disagreements on strategy, with Pedro de Queiros Pereira, the Harvard-educated chairman of both Semapa and Secil, taking a more aggressive approach to developing the business than CRH. With Semapa having instigated the process that led to the arbitration in 2009, it may well be less than happy at its exercise now, with the price-earnings multiple likely to rise to double figures for 2011. But having made that decision some two years ago, CRH will no doubt be in a position to insist that it be carried out.

Secil only recently bought Lafarge’s Portuguese aggregates and concrete operations, consisting of four quarries and 30 batching plants and completed that deal on 30 June. Secil’s debt would have to be consolidated by Semapa, which is now going to have to find another €574m to buy out CRH. Apart from the main Portuguese business, Secil has two cement operations in the Near East and a smaller cement business in Angola. It is conceivable that Semapa might wish to do a deal with CRH in respect of Ciments de Gabes in Tunisia, which has a cement capacity of 1.4Mta and a ready-mixed concrete operation, and/or the controlling 50.5% stake in Ciment de Sibline, the third cement producer in the Lebanon, which has a cement capacity of 1.2Mta and also some downstream operations. This would leave Semapa with Portugal and Angola. Irrespective of any such deal being done, CRH will then have the benefit of additional funds at its disposal to invest in either cement or in its other building materials activities.

Next week’s first half results…
While CRH’s performance is expected to reflect the prevailing economic headwinds, the overall outlook is positive. Bernstein analysts expect a strong first half performance from CRH’s European businesses will compensate for a fall in revenue in North America. Acquisitions made in 2010 will contribute positively, adding an estimated +4% to company results in 2011. The broker argues that CRH will also benefit from investments made into low-cost plants in the rapidly-recovering Polish and Ukrainian markets. On the downside, the company is heavily exposed to the US dollar, typically representing around half of EBITDA, which has weakened against the euro. Furthermore, as for all companies in the sector, cost inflation continues to affect margins. CRH reports its interim results on 16 August.
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