CRH back on the acquisition trail

CRH back on the acquisition trail
06 October 2017

Financial analysts have been predicting for some time that CRH was likely to hit the acquisition trail again to bolster its portfolio. The recent US focus to target Ash Grove Cement and Suwanee America Cement will reshape the North American cement landscape, subject to Ash Grove and Suwanee shareholder and regulatory approvals.

Debt reduction
The Irish company had been lowering its debt since the EUR7.8bn it shelled out on buying assets from former Lafarge and Holcim facilities in 2015, but the company’s debt fell from three times its EBITDA in 2015 to just 1.7 times last year. In 1H17 the company generated EUR72m from divesting clay product business units in Europe and prefabricated concrete businesses, while in March 2017 it sold an integrated cement plant and a grinding station in Germany for EUR349m.

North America offers significant value for CRH
CRH stock has fallen by 13 per cent since mid-May following poor weather in North America where 60 per cent of its earnings are made, according to the Irish Times. Not discouraged by this, the company has sought to reinforce its position in the American market by buying Ash Grove Cement, the fifth largest cement producer in the USA. The transaction is expected to be completed by the end of 2017.

The deal would allow CRH to add Ash Grove's eight cement plants to its portfolio in eight states as well as ready-mix, aggregate and logistic assets in the US Midwest for a total of US$3.6bn.

“Ash Grove Cement is an excellent addition to CRH’s portfolio of businesses across North America as we seek to deploy our capital into high-quality businesses that enhance our global asset base and provide opportunities to create shareholder value,” said Albert Manifold, CRH chief executive.

“The acquisition of Ash Grove Cement meaningfully expands CRH’s cement production capabilities globally and is a significant expansion in the US,” said David Holohan, chief investment officer at Merrion Capital in Dublin. 

Davy analysts estimate that CRH is buying Ash Grove Cement at a price between 10.5 and 13.5 x EBITDA. “This effective recycling of capital should result in structural improvements in the group’s returns over time,” Davy said. “It is also investing in a business where it has significant synergy and growth potential.”

However, there has been a potential challenge this week from WeissLaw LLP that believes the deal undervalues Ash Grove Cement and it will look to intervene on behalf of Ash Grove Cement shareholders. Ash Grove Cement subsequently received a larger takeover proposal valued at US$3.8bn, surpassing the earlier offer from CRH Plc.

Suwanee America Cement would be a much smaller deal in the region at US$750m, but it would give CRH its second cement plant in Florida, one of USA’s largest cement markets. The Irish company already owns the 0.31Mta Trident plant in Montana.

A growing multinational
Ash Grove has been active in the M&A markets this year. In August 2017, CRH sold its US distribution business to Beacon Roofing Supply Inc for US$2.63bn (x16 EBITDA of 2016), which cleared the way for the Ash Grove Cement acquisition. Earlier in 2017, the company had been busy increasing its downstream portfolio in North America with the acquisition of Mulzer Crushed Stone Inc, the biggest of 11 transactions that saw US$619m spent by CRH on investments in 1H17.

In Europe, CRH purchased the German lime and aggregates firm Fels, which it is buying for US$712.9m. This will make CRH the second largest player in the European lime market.

CRH has been vying for new markets on several fronts having expanded its Asian operations with Republic Cement in the Philippines, and with the former St Lawrence cement (Holcim Canada Inc) plants of Joliette and Missisauga in Canada, plus former Lafarge and Holcim plants in Europe that it acquired in 2015.

India next?
CRH invested in My Home Industries Ltd (Maha Cement) in 2008 and was reported to be interested when asset sales from the Lafarge disposals in India came up in 2015, but it was at a time when CRH needed to reduce its debt. Nirma Ltd was the eventual winner of the Lafarge India facilities that were divested. While India is expected to see cement demand rise, there is still significant overcapacity in the domestic cement market and it may be that CRH must await a better time to grow its business there, once utilisation levels pick up and market fundamentals are stronger.

Published under Cement News