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Cemex Says Debt Terms Create ‘Nightmares’ of Missing Mergers

Cemex SAB's chief of planning and finance Fernando Gonzalez. Photographer: Daniel Acker/Bloomberg
Cemex SAB's chief of planning and finance Fernando Gonzalez. Photographer: Daniel Acker/Bloomberg

Cemex SAB, the biggest cement maker in the Americas after $29 billion in global acquisitions over two decades, is concerned that its efforts to cut debt will mean sitting out the next round of industry consolidation.

“Our strategic position in the sector appears in my nightmares,” Fernando Gonzalez, chief of planning and finance, said in an interview at Bloomberg’s New York headquarters. “The largest players might grow faster than what we can do in the next five years, and that keeps me up.”

After a near-default on $21.7 billion in debt in 2009, any expansion will have to come through an investment fund in which Monterrey, Mexico-based Cemex will be a minority partner, rather than the direct purchaser, Gonzalez said.

The largest cement makers, led by Holcim Ltd. and Lafarge SA, may keep buying rivals as construction rebounds, said Gonzalo Fernandez, an analyst with Banco Santander SA. About $21 billion in cement-related acquisitions were announced globally in the 12 months ended June 8, almost three times as much as in the prior year, according to data compiled by Bloomberg.

“The main fear is letting good opportunities in good markets pass by,” Mexico City-based Fernandez said.

Cemex’s Gonzalez estimated that there is a potential for $42 billion of acquisitions worldwide in cement operations, the largest share of a possible $70 billion of deals in the global building-materials industry.

Keeping Pace

“Our competitors are nowadays in good shape, and I’m sure they have their plans to continue the growth process,” said Gonzalez, 55. “We know we have to keep the pace.”

He said Cemex’s investment fund, unveiled in April, may offer a way around the limits on acquisitions put in place by creditors after an agreement with banks in August to refinance about $15 billion in debt through 2014. The company sold shares and assets to reduce debt and adopted a cap of $100 million a year for acquisitions or joint ventures.

Cemex hired Lazard Ltd. to help drum up interest in the fund, Blue Rock Cement Holdings SA, and expects to reach its target of having $500 million to invest “at the latest in a couple of months,” Gonzalez said.

Cemex would take a minority stake of 10 percent to 20 percent in the fund and run any cement plants acquired or built. At the end of five years, Cemex would have the option to buy out its partners, Gonzalez said. The company will contribute the entire $100 million it’s allowed to spend on acquisitions this year, he said.

Growth Strategy

“We will see how far we can go with this idea,” said Gonzalez, the No. 2 official behind Chief Executive Officer Lorenzo Zambrano, who embarked on a strategy of acquisitions to build the company when he became CEO in 1985. Cemex is No. 4 in the industry worldwide in production capacity, trailing Holcim, Lafarge and Germany’s HeidelbergCement AG.

In the past, Cemex was able to keep pace with competitors though acquisitions such as Australia’s Rinker Group Ltd. for $14.2 billion in 2007, RMC Group Plc in the U.K. for $5.5 billion in 2005, and Houston-based Southdown Inc. for $2.8 billion in 2000.

Purchases that large are no longer feasible for Cemex, said Michael Betts, a Jefferies Group Inc. analyst in London who has a “buy” rating on the shares.

“Cemex, in my view, needs to change its strategy longer term to smaller acquisitions more frequently,” Betts said in an e-mail. “It now has the product and geographic spread to do this.”

Cemex should concentrate on reducing debt, rather than on expanding to keep up with peers, said Banco Santander’s Fernandez, who has a “hold” rating on the stock.

While the cement maker’s loan covenants force it to shrink debt and improve finances, the fund has no such restrictions. If Cemex’s fund raised $1 billion, it also could borrow $2 billion more to purchase companies, said Daniel McGoey, an analyst with Citigroup Inc. in Mexico City.

‘Acquisition Ammunition’

“It’s very doable,” said McGoey, who recommends buying Cemex stock. “The bottom line is that $3 billion of acquisition ammunition could be very effective.”

The fund should be “very appealing” to private-equity investors because they can tap into Cemex’s operating expertise and have a clear exit strategy after five years, McGoey said.

Cemex said in April the fund’s first project would be to build a cement plant with 1 million metric tons of annual capacity in Peru for $230 million.

Cemex has fallen 7.5 percent in Mexico City trading this year. That compares with a 4.5 percent drop for Jona, Switzerland-based Holcim, a 13 percent decrease for Paris-based Lafarge and a decline of 6.1 percent for HeidelbergCement.

Brazil, Australia

Lafarge doubled annual production capacity in Brazil to 7 million metric tons as it acquired cement operations while shedding a stake in a building-materials maker in February. The company also said in May it’s combining its cement operations in central and eastern Europe with those of Vienna-based Strabag SE. Lafarge will own 70 percent of the venture.

Holcim bought Cemex’s Australian business for about $1.7 billion in October when the Mexican company was forced under its bank financing agreement to come up with funds to pay debt.

Growth through takeovers is a need in the cement industry, where the size of acquisitions ballooned before the recession, Cemex’s Gonzalez said.

“We want to continue being a leader,” Gonzalez said. “If you want to continue being in this world a few years from now, you better stay at that level.”

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