Cement Deals Lay Foundation for Building Boom: Real M&A

For signs that construction is on the mend, look no further than the cement industry.

Money being spent to acquire suppliers of building materials worldwide is surging to the highest level since at least May 2008, according to data compiled by Bloomberg. After $22 billion of deals in the past 12 months, Holcim Ltd. and Lafarge SA -- the world’s two biggest cement makers with a combined market value of more than $50 billion -- are in advanced merger talks.

“What we’re seeing is a recognition by these companies that the bottom is in and that the recovery is happening,” Todd Vencil, a Richmond, Virginia-based analyst at Sterne Agee Group Inc., said in a phone interview. “Companies are feeling confident enough about that to have the buyers and sellers able to come together now.”

A tie-up of Holcim and Lafarge would allow the cement producers to cut costs as some of the industry’s kilns run at a loss after the global recession eroded demand for building materials. The merger will likely spur even more deals as the companies are forced to sell off assets to appease regulators, according to Cantor Fitzgerald LP.

Cement makers are setting themselves up to profit as construction spending accelerates. In January, Martin Marietta Materials Inc. agreed to buy Texas Industries Inc. for about $2.7 billion in the industry’s biggest North American deal in five years.

Not Waiting

“People want to get the chess pieces in order where they want to be through this next cycle,” Trey Grooms, a Little Rock, Arkansas-based analyst at Stephens Inc., said in a phone interview. “They don’t want to wait until the peak like we saw last time.”

The discussions between Jona, Switzerland-based Holcim and Paris-based Lafarge “are based on principles consistent with a merger of equals which build on the strengths and identities of the two companies,” Holcim said in an e-mailed statement today. The company said no agreement has been reached and the talks could still fall apart.

Both Holcim and Lafarge said earlier this year that demand for their offerings is reviving amid a global economic recovery. In February, Holcim forecast improved cement shipments in 2014 while Lafarge reported earnings that beat analysts’ estimates and also predicted increasing demand.

Recovery Expectations

In the U.S., construction spending increased 8.7 percent in the 12 months ended in February and 9.4 percent in the period ended in January, the fastest since 2006, data from the Census Bureau compiled by Bloomberg show.

U.S. cement consumption will rise 8.1 percent this year to 86 million metric tons and will continue to increase through 2018, according to estimates from the Portland Cement Association.

With the cement takeovers, buyers may “see a recovery and want to get ahead of it,” Jack Kasprzak, analyst at BB&T Corp., said in a phone interview from Richmond. “Some of those stocks have been up and the market has been anticipating a recovery.”

Martin Marietta, with a market value of $5.9 billion, rose 31 percent in the past 12 months, while Vulcan Materials Co., an $8.7 billion company, climbed 37 percent.

In the five days through April 3, U.S. exchange-traded funds focusing on industrial companies attracted a net $560 million, the most among U.S. sector-specific ETFs, according to data compiled by Bloomberg.

Holcim and Lafarge face antitrust hurdles to completing their merger, and regulators across the globe will likely require divestitures, according to Ian Osburn, a London-based analyst at Cantor Fitzgerald.

‘Feeding Frenzy’

Companies such as Martin Marietta and Vulcan will probably want to pick up some of the U.S. assets that will be divested from the merger, said Osburn, who also sees Vulcan as a potential takeover target as the industry consolidates.

A representative for Birmingham, Alabama-based Vulcan declined to comment. A representative for Raleigh, North Carolina-based Martin Marietta didn’t immediately respond to a request for comment.

It’s also possible that private-equity firms could take a look at some businesses, though the expertise needed in this industry and the difficulty generating returns could keep financial buyers at bay, Cantor Fitzgerald’s Osburn said.

Should the Holcim-Lafarge merger go forward, “there would have to be a large number of asset sales in quite a number of countries,” Osburn said in a phone interview, referring to Holcim-Lafarge. “The buyers would be all of the major competitors. Basically, it would be a bit of a feeding frenzy.”

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