CRH moves to cement biggest deal in its history

Cemex is being forced to sell some of its firms and Irish materials group thinks it's an opportunity not be missed, writes Barry O'Halloran

It almost slipped under the radar amid the ups and downs on the financial markets this week, but the Republic's biggest plc announced a few days ago that it is on the road to doing the biggest deal in its history.

Building materials group CRH said on Monday that it was in talks with rival Cemex to buy a range of businesses in the US and Europe from that company that could cost it anything from €2.5 billion to €3.2 billion.

The talks are well advanced and the Irish group is on the verge of beginning due diligence, the process that allows it to run the financial rule over the operations it is seeking to buy and evaluate them.

If it does the deal, it will be far bigger than any it has done previously.

Last year, it made its biggest acquisition to date when it bought US asphalt and building materials producer APAC for €1.1 billion.

In terms of price, the Cemex deal will be at least twice the size of the APAC transaction, and it could potentially be worth three times that.

CRH is not attempting to buy cast-offs from its Mexican-based competitor. Cemex recently completed a €14 billion takeover of yet another building materials player, Rinker.

As a condition of being allowed to do that, the US competition law watchdog, part of that country's justice department, has ordered Cemex to sell those operations it has now placed on the block in America.

Alongside this, the group is also selling some European businesses, which account for 20 per cent of the entire package, in an effort to cut its debts, which are currently around four times its earnings before tax and write-offs.

Analysts, such as Barry Dixon at Davy Stockbrokers in Dublin and Harry Goad at Credit Suisse in London, believe that this is an opportunistic bid by CRH.

They say the Irish company is exploiting the chance to pick up some decent assets that a key rival is now being forced to sell.

And they say that the timing of the Cemex sell-off suits CRH as well.

Dixon points out that the current squeeze on credit in global financial markets has knocked private-equity houses out of the equation because they cannot raise the low interest loans they use to fund their acquisitions. This has left the road more or less clear for the Irish group.

This does not mean that it is going to get the Cemex businesses at a bargain basement price. It will still have to pay a substantial sum.

This has led ratings agencies such as Moody's and Fitch, which measure a company's ability to repay its debts, to warn that they may downgrade CRH's rating.

But that stands at a copper-bottomed BBB+, and its revised mark is likely to be a slightly less copper-bottomed BBB, which means it will still be a solid bet for lenders.

CRH finance director Myles Lee said this week that the group has the resources to pay for the acquisition and continue to buy smaller businesses as well.

The company is generating between €700 million and €800 million in free cashflow, and has a strong balance sheet. Its earnings before interest, tax and write-offs are nine times the net interest payments on its debts.

Lee has been saying for some time that the group could easily cut this ratio to six times interest payments. Dixon also argues that its balance sheet is strong enough to take on the deal.

Another concern is CRH's ability to integrate the operations involved. They are a diverse group, ranging from producers of such basic quarried products as stone to a gypsum wall components distributor.

CRH is used to mopping up what it calls "bolt-ons". These are small businesses that fit in with its existing operations and that can be slotted into the group easily.

Lee says that the Cemex operations are essentially a large number of bolt-ons, and that the Irish company will have no problem absorbing them. "We're well used to managing that process, and this will be no different," he says.

If it happens, the Cemex deal will increase CRH's exposure to the US. The group's revenues have tended to split 50/50 between the US and Europe, although this has varied with market conditions and exchange rates.

In the first half of this year, American sales were €4.6 billion and European revenues ran to €5 billion. If this deal is done, the analysts say that the business could be split 60/40 in favour of the US, but they stress that this is a "very rough" estimate.

Some observers may feel that this is not the time to be increasing exposure to the US, particularly in light of the impact that the credit squeeze is having on the housing market.

However, CRH's main focus in the US lies outside house building. Dixon says that 40 per cent of its business there is supplying materials for infrastructure projects, which largely consist of highways in the US.

This business is underpinned by state and federal funding. A further 30 per cent of it is in commercial, non-residential building, which Dixon - and CRH itself - says is continuing to perform strongly.

Dixon's research note, published in reaction to news that the talks were under way, has set a long-term target price of €42 for the stock.

Investors remain wary, but with the likelihood that acquiring additional mature businesses will boost revenues and earnings, they could well come around.