Vulcan Trading Below Hostile Bid Reflects Deal Obstacles

Vulcan Materials Co. (VMC) fell below Martin Marietta Materials Inc.’s (MLM) hostile bid for the first time last week, indicating doubts among investors that the all-stock deal valued at $5.5 billion will succeed.

Vulcan, the largest U.S. producer of gravel and sand, closed at $42.73 in New York on March 30, 0.2 percent lower than Martin Marietta’s Dec. 12 offer. Vulcan’s shares, which traded as much as 7.7 percent higher than the bid in February, inched 0.8 percent above the offer today.

The deal faces two obstacles this month: a Delaware judge’s ruling that may block Martin Marietta’s bid and a possible U.S. Justice Department decision to order more asset sales than the suitor expected. A negative outcome on either may put the transaction in jeopardy, said Todd Vencil, a Richmond, Virginia- based analyst with Sterne, Agee & Leach Inc.

“It’s obvious on the face of it that some investors think that the deal is less likely to happen than they did a few days ago,” Vencil said. “There’s a fair amount of downside in Vulcan shares relative to Martin’s if there’s no deal in place.”

Martin Marietta Chief Executive Officer Ward Nye made the hostile bid of half of one of his company’s shares for each of Vulcan’s after talks with the target’s Chief Executive Officer Don James broke down in mid-2011. The two began merger discussions in 2010 and eventually disagreed on cost savings, who would run the new company and what asset sales would be needed to comply with antitrust regulations.

Vulcan rose 1.1 percent to $43.19 in New York at the close in New York. Martin Marietta rose 0.1 percent $85.72, valuing half a share at $42.86.

‘Low Ball’

James rejected the hostile offer as “very low ball” and said Martin Marietta used confidential information. Martin Marietta preempted Vulcan’s legal complaint with a Dec. 12 lawsuit seeking a ruling that a May 2010 confidentiality agreement didn’t prohibit the bid.

Judge Leo Strine is scheduled to hear post-trial arguments on April 9 and may decide the case that week.

Both James and Nye have been wooing investors prior to Vulcan’s annual shareholders meeting, which may be held as soon as May. Martin Marietta nominated candidates to replace five of the 11 Vulcan directors, then trimmed its slate to four when Vulcan reduced the size of the board to 10 following a member’s retirement.

While Martin Marietta can’t gain control of the board, the vote will gauge support for its offer, said Ted Grace, a Bala Cynwyd, Pennsylvania-based analyst with Susquehanna Financial Group.

Martin Marietta Agreements

In a letter today, Vulcan said that Martin Marietta entered into confidentiality agreements with the nominees it proposed that should have been disclosed before a Feb. 13 deadline under Vulcan’s bylaws. Vulcan requested in the letter that Martin Marietta provide the agreements.

Martin Marietta said in an e-mailed statement today that its nominees to the board are independent, are qualified under Vulcan’s bylaws, and don’t have any contractual agreements with the Martin Marietta.

Vulcan may convince shareholders to reject Martin Marietta’s offer with a plan disclosed in February to cut costs by $100 million this year in addition to $55 million last year and sell $500 million of assets to repay debt, Grace said.

“Increasingly people have come to the realization that the chances of the deal getting done are low,” Grace said.

Florida Rock

The combined companies would create the world’s largest producer of sand and gravel and generate annual cost savings of $250 million, Martin Marietta has said. The merger also would bolster Vulcan’s finances after earnings slumped following the $4.2 billion acquisition of Florida Rock in 2007, Martin Marietta said. The suitor proposed a quarterly dividend equal to 20 cents a Vulcan share, partly restoring the payout that Vulcan cut to 1 cent from 25 cents last year.

Boosting its bid might help Martin Marietta win support from Vulcan shareholders, said Brent Thielman, an analyst with D.A. Davidson & Co. in Lake Oswego, Oregon. Vulcan’s shares had traded higher than the offer since Dec. 12, after an initial jump of 15 percent, amid speculation that Martin Marietta would raise its offer, he said.

“I can’t imagine Martin Marietta came into this without some thought they may have to sweeten this deal,” Thielman said. “I still feel there’s an opportunity for that to be on the table.”

Asset Sales

Martin Marietta, based in Raleigh, North Carolina, said it will discuss the deal’s antitrust issues with the Justice Department in the last two weeks of April and will try to reach a consent order on assets that may need to be sold. If a Justice Department accord can’t be reached then, Martin Marietta pledged not to seek to close the transaction before mid-August.

Antitrust issues will probably force asset sales that would “destroy value,” Vulcan has said. The Birmingham, Alabama- based company said gross profit from operations that overlap with Martin Marietta’s range from $177 million in a 20-mile radius to $344 million at 60 miles. The Justice Department requested information from Vulcan on aggregates transported from 20 miles (32 kilometers) to 200 miles of quarries and asphalt shipped as far as 60 miles, the company said in January.

Vulcan shares may drop further because of investors concerned that the deal will hit a roadblock with decisions against Martin Marietta from the trial and antitrust talks, Vencil said. Favorable rulings would keep the deal going without ensuring it will be successful, he said.

“It comes down to the divestitures and the judge,” Vencil said.

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editor responsible for this story: James Langford at jlangford2@bloomberg.net

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