Martin Marietta Seen Bumping Vulcan Bid: Real M&A
Now that Martin Marietta Materials Inc. is cleared to renew its pursuit of Vulcan Materials Co. (VMC) and create the world’s biggest supplier of gravel and sand, it needs to boost the initial bid by 40 percent to cement a deal.
As of Sept. 15, Martin Marietta is allowed to pursue a takeover of the Birmingham, Alabama-based gravel producer again, after a judge delayed the hostile buyout in May. Vulcan shares closed at $49.17 last week, 8.1 percent higher than the value of the original all-stock bid and the widest gap since it was disclosed in December, according to data compiled by Bloomberg.
Vulcan’s stock gain signals that some investors are betting Martin Marietta will revive the deal and sweeten the terms, Tullett Prebon Plc said. To win over Vulcan’s board and shareholders, Thompson Research Group said Martin Marietta may need to offer 0.7 share for each Vulcan share, a 40 percent boost in the takeover price from the original 0.5-to-1 ratio. While U.S. regulators may demand divestitures as a condition of approval, Sterne Agee & Leach Inc. said a merger to create a market leader and reduce costs still makes sense.
“The injunction is over,” Sachin Shah, a Jersey City, New Jersey-based special situations analyst at Tullett Prebon, said in a telephone interview. “Now it’s up to Martin Marietta. They’ll have to pay up. At this point, it behooves Martin Marietta to try to do a more friendly deal.”
Anne Lloyd, Martin Marietta’s chief financial officer, declined to comment on whether the Raleigh, North Carolina-based company is considering a second bid. Meghan Gavigan, a spokeswoman for Vulcan who works at Sard Verbinnen & Co., declined to comment on a possible offer from Martin Marietta.
After merger discussions that began in April 2010 between the two companies broke down, Martin Marietta made a hostile offer on Dec. 12 to exchange half a share for each share of Vulcan. The deal valued Vulcan’s equity at $4.8 billion, data compiled by Bloomberg show.
Vulcan, the larger of the two companies with a market capitalization of almost $6 billion versus Martin Marietta’s $4 billion, rejected the bid as being too low and said that regulators would force the sale of assets, undercutting the value of the transaction. Ward Nye, chief executive officer at Martin Marietta, said at the time that a combined company would claim about 15 percent of the U.S. aggregates market and save as much as $250 million in costs from bulk purchases and duplicate operations.
On May 4, a Delaware Chancery Court judge ruled that Martin Marietta violated an earlier agreement with Vulcan by using confidential information to devise its bid and said the company couldn’t proceed with the deal for four months. To comply with the court order, Martin Marietta withdrew the offer on May 14.
Since the May decision, Vulcan’s stock gained 19 percent through last week to $49.17. Martin Marietta’s all-stock offer would have been valued at $45.47 on Sept. 14.
Vulcan ended yesterday at $46.21, still 5.6 percent above the takeover price. The premium indicates that some investors are anticipating Martin Marietta will return with a higher bid now that the injunction is over, said Tullett Prebon’s Shah.
The 0.5 exchange ratio is a “non-starter” for Vulcan, according to Kathryn Thompson, an analyst at Thompson Research in Nashville, Tennessee. For Vulcan to be willing to revive negotiations, she estimates Martin Marietta may need to increase the ratio to 0.7.
At that ratio, Martin Marietta’s closing price yesterday implies an offer of $61.27 a share, or about a 33 percent premium for Vulcan stockholders. That compares with the average 31 percent premium that buyers have paid in building-materials acquisitions globally larger than $1 billion, data compiled by Bloomberg show.
Shah estimated a ratio of at least 0.6-to-1 would be needed to “get in the ballpark of what the Vulcan board wants.” That implies a 14 percent premium based on yesterday’s closing prices.
“Whatever the offer is, it has to move higher and that’s the bottom line,” he said. “That 0.5 has to go up.”
More pricing power and increased profitability are among the potential benefits of a merged company and make it worth increasing the offer to ensure a deal gets done this time, Thompson said.
“It’s probably pretty highly likely” that Martin Marietta renews its bid, she said in a phone interview. “Does it make sense just from an overall industry standpoint? Yes, it absolutely does.”
U.S. construction spending, after falling every month for almost four straight years amid a weak housing market and a slump in state and local government infrastructure spending, has climbed each month since November, Census Bureau data show.
With the industry showing signs of recovery, analysts project sales and earnings before interest, taxes, depreciation and amortization at both Vulcan and Martin Marietta will climb during the next three years.
Still, Martin Marietta hasn’t yet said it will pursue the takeover, and Vulcan may be less likely to agree to one now that the outlook for the construction industry is improving, said Jack Kasprzak, a Richmond, Virginia-based analyst with BB&T Capital Markets.
“I do not think it’s a foregone conclusion that they’re going to try again,” he said in a phone interview. “A company that wasn’t interested in a merger in the first place would probably be more emboldened against it now.”
Regulators may demand asset sales, depleting the so-called synergies that underscore the merger, according to Ted Grace, a Boston-based analyst at Susquehanna International Group LLP. Vulcan also has improved its operations since the deal collapsed, leaving less room for Martin Marietta to cut costs at the combined entity, Grace said.
Analysts estimate Vulcan will post net profit next year for the first time since 2009, the year that the longest recession since the Great Depression ended. The company earned 6.2 cents in operating income for each dollar of sales last quarter, the highest operating margin since the period that ended in September 2010, the data show.
“It makes the deal harder to justify now,” Grace said in a phone interview. “Martin would have to pay more and get less.”
Even so, two of Vulcan’s shareholders have signaled support for a possible combination that could create a stronger competitor than the two companies would be on their own.
The Ireland family, collective holder of about 1.5 million Vulcan shares and descendants of the company’s founders, favors another bid because there is “still a compelling business case” for a combination, Guy Mitchell, a family member, said in a phone interview last week.
Loomis Sayles & Co. also would welcome a new attempt, said Arthur Barry, a fund manager. Boston-based Loomis Sayles held about 938,000 Vulcan shares as of June 30, according to data compiled by Bloomberg.
“Martin has always said it hopes to get Vulcan back to the table and they want to pursue a negotiated bid,” Todd Vencil, an analyst at Sterne Agee in Richmond, Virginia, said in a phone interview. “This is a deal that’s attractive from the standpoint of market position and the opportunity to improve operations. I don’t see why they wouldn’t be interested in going forward.”