Martin Marietta Materials Inc. may need to sweeten its hostile $4.8 billion bid for Vulcan Materials Co. after the company’s shares topped the offering price to create the world’s largest supplier of sand, gravel and stone.
Vulcan rose 15 percent to $38.70 at the close in New York, 3.7 percent more than Martin Marietta’s proposed exchange of 0.5 share of its own stock for each Vulcan share. Martin Marietta, based in Raleigh, North Carolina, rose 1.7 percent to $74.61.
“The valuation is probably going to have to be adjusted before everything is said and done to put it together,” said Keith Johnson, an analyst with Morgan Keegan & Co. in Memphis, Tennessee, who has a “market perform” rating on Vulcan and an “outperform” on Martin Marietta.
The hostile offer follows losses for Birmingham, Alabama- based Vulcan, the largest U.S. producer of crushed stone, in three of the last four quarters amid a U.S. construction recession. Vulcan, saddled with debt following its $4.2 billion acquisition of Florida Rock Industries in 2007, had its senior unsecured debt rating reduced to Ba2 by Moody’s Investor Service Inc. in September, two levels below investment grade. The company cut its quarterly dividend (VMC) to 1 cent a share in November from 25 cents.
Martin Marietta Chief Executive Officer Ward Nye said his company made the unsolicited offer after Vulcan broke off talks for a merger earlier this year. The bid had a 9.4 percent premium as of Dec. 9 and valued Vulcan at $4.7 billion. The two companies together would be more profitable through cost cuts and more financially sound, Nye said in a telephone interview.
“Bringing together these complementary businesses simply makes good strategic and financial sense,” Nye said. “We will create the must-own stock in the sector.”
The bid is a 15 percent premium to the average exchange ratio based on the closing share prices for Vulcan and Martin Marietta for the 10 days ended Dec. 9, according to Raleigh, North Carolina-based Martin Marietta.
That compares with an average premium of 5.3 percent paid for cement makers worldwide in the past three years, after the collapse of Lehman Brothers Holdings Inc. and the global financial crisis, according to data compiled by Bloomberg.
Data compiled by Bloomberg shows about 30 percent of hostile or unsolicited bids for U.S. companies disclosed from 2000 to 2010 were eventually completed.
Martin Marietta sued Vulcan in Delaware Chancery Court in Wilmington today asking a judge to declare that a May 3, 2010 non-disclosure agreement between the two “does not prohibit Martin Marietta’s public offer to purchase all issued and outstanding shares of Vulcan’s common stock in exchange for Martin Marietta’s stock.”
The suit also seeks a ruling that allows Vulcan stockholders “to vote for the election of Martin Marietta’s five independent nominees” to Vulcan’s board.
Martin Marietta would bring better finances and cost discipline to Vulcan’s “chronically high” spending, said Robert Wetenhall, an analyst with RBC Capital Markets in New York. Vulcan has the “best portfolio of aggregate reserves in North America,” he said.
“Under the guidance of Martin, they can realize sizable savings that can justify the premium,” Wetenhall said. “It’s a really good deal for Martin if it goes through.”
Martin Marietta traces its roots to Raleigh, North Carolina-based aggregates supplier Superior Stone. A 1961 merger with aerospace company Glenn L. Martin Co. created Martin Marietta Corp., which in turn combined with Lockheed Corp. in 1995 to form defense contractor Lockheed Martin Corp. (LMT) Lockheed split off Martin Marietta the following year.
Martin Marietta sees cost savings of as much as $250 million with the merger and would keep the annual dividend at the equivalent of $1.60 per Martin Marietta share, the company said. That payment would be 20 times greater than Vulcan’s current dividend, Martin Marietta said.
The combined companies would have market value of $7.7 billion and $3.7 billion of debt, according to Martin Marietta. The two companies together would have 15 percent of the U.S. aggregates market compared with 6 percent for its next competitor, Ireland’s CRH Plc. Aggregate annual shipments by ton would be 278 million tons, overtaking HeidelbergCement AG, which has 264 million tons, as the world leader.
With the cost savings, earnings before interest, taxes, depreciation and amortization -- a measure of cash flow known as Ebitda -- could jump 30 percent for the combined companies, Wetenhall said.
Deutsche Bank AG and JPMorgan Chase & Co. are advising Martin Marietta, and Skadden Arps Slate Meagher & Flomm LLP is legal counsel. Goldman Sachs & Co. (GS) is Vulcan’s financial adviser and Wachtell, Lipton, Rosen & Katz is providing legal advice.
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