Investors lukewarm but analysts applaud CRH deal

Analysis:CRH finance director Myles Lee said only last month that the group had the resources to do "big deals" if they come up, writes Barry O'Halloran.

One has just come up. The Irish building materials group is in talks to buy a raft of businesses in the US and Europe, for a total of up to €3.2 billion, from one of its rivals, Mexican giant Cemex.

That's a big deal by anyone's standards, the biggest in CRH's history, and it already has stock market analysts applauding.

Harry Goad at Credit Suisse in London notes the group is cashing in on the fact that the US competition authorities are forcing Cemex to sell some of its operations as a result of its €14 billion takeover of another big building materials player, Rinker.

But, while Goad and his colleagues believe it's the right deal at the right time, investors were lukewarm yesterday. CRH's share price fell by almost 4 per cent to €3.69 in a falling Dublin market. That was partly a result of general wariness of the construction materials sector and partly the credit squeeze itself. CRH will have to take on extra debt to buy the Cemex operations.

International credit ratings agencies such as Moody's and Fitch, which measure companies' abilities to repay their debts, said they might have to review the ratings they have given CRH as it will have to increase its debt.

CRH's current ratings are BBB+ and BAA1, which means your money is copperbottomed should you loan it to them. Lee says the group itself would be happy with the slightly lower BBB rating. He is very sanguine about the group's ability to handle an acquisition of this size. "We are generating between €700 million and €800 million a year in free cash flow; we're very comfortable with this," he says.

He points out that CRH's earnings before interest, tax, depreciation and amortisation (Ebitda - a measure of a company's cash earnings) is 9.2 times the interest payments on its debts.

"We have said that we want to move that close to six times Ebitda, and this will do that and still leave us with the scope to continue doing smaller, bolt-on acquisitions if necessary."