Firm to rein in spending on acquisitions

ANALYSIS:LAST AUTUMN, building materials group CRH signalled it was planning to rein in spending on acquisitions except in cases where there was "compelling value".

In 2008, it spent about €1 billion on buying up mainly smaller rivals, which were absorbed into the group.

The figure was half what it paid the previous year, when it made its largest ever acquisition, the €1 billion purchase of US asphalt distributor Apac.

Yesterday the group not only said it believes there will be plenty of cases of value coming up in the near future, it announced that it intends raising €1.238 billion from its shareholders, €738 million of which will go towards funding acquisitions.

The same market conditions that kept CRH’s revenues flat at €20.9 billion and cut operating profits by 12 per cent to €1.8 billion, are helping to create an environment where the group will have what chief executive Myles Lee described as a “pool of acquisition opportunities” available to it.

The building slump that last year settled over CRH’s main markets in Europe and the US, followed a period where many in its industry borrowed heavily to fund purchases.

Or as Lee put it yesterday: “There have been a lot of very large deals done in the last few years and some people got carried away with leveraging themselves.”

Those rivals are now cutting back, meaning that they will have to sell some elements of their businesses.

But in a situation where everyone is looking to sell, then it is likely that prices could be more than reasonable.

At the same time, owners of the smaller companies typically targeted by CRH are reducing the asking price for these operations.

It was clear from Lee’s statements yesterday that it walked away from deals where it felt the sellers were asking too much, and that talks are under way again with some of them, whose expectations have changed in line with conditions in the sector.

Even though CRH is back at the negotiating table, and is planning to raise cash to fund purchases, these vendors should not get their hopes up just yet.

It looks like the Irish group intends driving hard bargains.

Even as he acknowledged that sellers had accepted the new reality in their business, Lee added that many of them still need to “adjust their expectations downwards even further”.