Vulcan Materials Co. (VMC) will try to convince shareholders in private meetings to reject a hostile bid from Martin Marietta Materials Inc. (MLM), telling them that Vulcan’s profits will rise more quickly than its suitor’s once U.S. construction rebounds.
Vulcan, which broke off merger talks with Martin Marietta in late June, said today its board unanimously opposed the offer, valued at $4.7 billion when it was made on Dec. 12. Goldman Sachs Group Inc. (GS), which Vulcan hired to assess the deal, said the bid was “inadequate.”
“We’re in faster growing markets, we have great reserves in those markets and we think we’ve got far more upside than Martin Marietta over the next number of years,” Vulcan Chief Executive Officer Don James said in a telephone interview. “Our shareholders can benefit better stand-alone than we can in combination with Martin.”
Vulcan, the largest U.S. producer of crushed stone, has posted net losses in three of the past four quarters, and analysts surveyed by Bloomberg forecast losses for the next two quarters. The company cut its dividend this year as it struggles with debt after paying $4.2 billion for Florida Rock Industries Inc. in 2007 just as the construction slump began. Martin Marietta said its offer of half of one of its shares for each Vulcan share would result in cost savings of as much as $250 million and boost the quarterly dividend to the equivalent of 20 cents per share of Vulcan from 1 cent now.
Vulcan wasn’t able to discuss the bid with investors until it made the public recommendation, while Martin Marietta had no such restriction.
Martin Marietta Support
“We are pleased with the support we have received regarding the combination,” Martin Marietta said in a statement responding to Vulcan’s rejection. “We are committed to completing this combination and are moving forward on a number of fronts to make it a reality.”
James said the offer is “very low-ball” and was made at the bottom of the construction cycle. Analysts said Martin Marietta may now have to raise its bid to win support, and the Raleigh, North Carolina-based company said it would “consider in good faith demonstrable evidence of additional value.”
Martin Marietta may have to make a bid of $45 a share or higher to succeed, Robert C. Wetenhall, a New York-based analyst with RBC Capital Markets, said in a telephone interview before Vulcan’s rejection.
The proposal from Martin Marietta, the second-largest U.S. producer of crushed stone, gravel and sand, “does not take into account the very valuable assets that Vulcan would bring to the table,” James said. “It does not value our recovery potential.”
Vulcan said its profits will rebound faster than Martin Marietta’s because it has more sales in markets hardest hit by the downturn, such as Florida and California. In a Dec. 19 letter included in the filing, Goldman Sachs said a review of the offer found it “inadequate from a financial point of view” for Vulcan shareholders.
A nine-month study done by both companies showed synergies of as much as $150 million, James said. He said he didn’t know how Martin Marietta calculated as much as $250 million in cost savings.
‘Significant’ Asset Sales
The companies’ operations overlap in 10 or 11 states, and James said the U.S. Justice Department might require “significant” asset sales, which would fetch low prices in a depressed market.
The offer is “subject to a great deal of execution risk, which Martin Marietta seems to have glossed over,” James said.
Vulcan’s rejection was anticipated by analysts after the company called the bid an attempt to “snatch Vulcan for the lowest possible price” in a court filing last week. Vulcan also filed a federal lawsuit this week seeking to block it.
That lawsuit, in U.S. District Court in Birmingham, Alabama, alleges Martin Marietta is exploiting inside knowledge from the earlier merger negotiations “to buy Vulcan at an unfair price” in violation of a confidentiality agreement. Vulcan CEO James told his board on July 8 that the talks between the two companies, which had begun in April 2010, had ceased, according to the regulatory filing.
Martin Marietta fell 0.8 percent to $75.79 at 4:15 p.m. in New York, and Vulcan rose 0.9 to $39.22. At those prices, a Vulcan share is valued 3.5 percent higher than the offer of half of a Martin Marietta share.
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