Merril Lynch on Cemex bid

Merrill Lynch on Cemex bid

Cemex has launched a bid at GBP8.50, a 39 per cent premium to previous 30 days, with agreement from RMC management. Before any synergies, this would represent a 13.5x 2005E P/E. Cemex states it expects US$200m of synergies by 2007E, which would be two per cent of 07E sales.

Merrill Lynch analysts sees Cemex’s bid as reasonable if it can achieve aggressive cost cutting targets (and its track record combined with RMC’s troubled one gives cause for hope on this front), although the multiples before synergies are full.

Anti-trust issues should be very minor - overlaps in California (plenty of competition) and Spanish rmc/aggregates (likewise fragmented) shouldn’t pose problems.

Strategically, widening Cemex’s cashflow base away from Mexico has benefits that probably offset the mature status of the UK and Germany, plus both of these markets also represent recovery opportunities given the German price war recovery and UK problems at the Rugby plant. A shift to more aggregates/rmc as downstream integration has been flagged already.

No counter bidders are expected: although Holcim could financially and competition-wise, consider an approach, it would be a stretch to match, let alone beat, Cemex. A consortium effort from other ’usual suspects’ (CRH, Lafarge, Anglo-American, HeidelbergCement) would surely be too unwieldy to be likely – state Merrill Lynch. Direct interest in RMC’s German assets from groups in that market with stronger synergy opportunities would clearly be better served by offering for just the German business, not a group bid, and might be something that Cemex could take advantage of, quickly crystallizing the value in a troubled operation.

Does this herald a second round of cement mergers? Cement majors have been constant consolidators globally, only taking breaths between credit-stretching sprees. Most remaining mid-sized groups are now meshed in family ownership, with Cimpor (local contractor Teixeira Duarte leading shareholder, plus Lafarge and Holcim among the rest) perhaps the main exception - concludes Merrill Lynch