CRH positioned for Canadian buys after Holcim/Lafarge deal
CRH (CRH:ID) will be well placed to pursue further Canada-based acquisitions after agreeing to buy certain assets from the Lafarge (LG:FP) and Holcim (HOLN:VX) merger, CEO Albert Manifold said Monday. He added that CRH would keep its options open regarding possible divestments.
On the conference call held to discuss the deal, Manifold said the Canadian assets were a good fit for CRH’s strong US position as the largest player in asphalt, aggregates and building materials.
The CEO explained that the deal gave the Ireland-based building materials group the opportunity to buy businesses in adjacent and complementary markets, noting that it was purchasing well-located aggregates and cement assets in Ontario and Quebec, as well as important supply terminals in the Northern US.
“It also allows us to roll out our vertical integration and bolt-on strategy into Canada. These assets that we're acquiring are primarily located around big footprint assets of cement and aggregates. They are not vertically integrated downstream all that much,” Manifold continued. “But, of course, CRH is a vertically integrated building materials business. We make most of our money when we do those bolt-on add-on transactions. And this will give us a whole new market with which to roll out that acquisition model that had been so successful for CRH in the past.”
The CEO said the North American segment was a “crucial fit” for the company, which gave it the chance for value creation in its existing businesses and further acquisitions in Canada.
In the Q&A session, Goldman Sachs analyst Will Morgan asked if CRH would acquire further upstream assets to expand its cement footprint in the US or if it would focus on the downstream space. Manifold said that prior to the Lafarge/Holcim deal, the company had looked at many potential US-based cement investments but had not been able to acquire any at the right price.
“But with these assets, we've got the opportunity to acquire cement assets at a price where we can make returns. That's what's unusual about this. So if we can find cement assets going forward at the right price, of course we'll look at them,” the CEO added. “We don't need to be there (in cement). I think if the opportunity presents itself again, we'll look at it.”
Lafarge/Holcim deal
The company said Monday it would acquire certain assets from Lafarge and Holcim for an enterprise value of EUR 6.5bn. The deal will be funded by EUR 2bn in cash from the balance sheet, new debt and a 9.99% equity placing.
CRH had announced on 22 January that it was in discussions with France-based Lafarge and Switzerland-based Holcim regarding the acquisition of certain assets being disposed of in advance of their proposed merger.
A presentation slide displayed on Monday’s conference call said CRH expected the transaction to be completed in mid-2015, following the anticipated close of the Lafarge/Holcim merger in June.
Options open
In his prepared remarks on Monday’s call, the CEO said CRH would consider whether it wanted to keep all the assets from the transaction and its existing business, noting that some would likely be divested.
He added that CRH would take on a partner for some of these assets, either due to regulatory issues, such as in the Philippines where a local partner was required, or to balance its capital allocation towards investments in other parts of the world.
In the Q&A session, Morgan Stanley analyst Yuri Serov asked for further details of the potential partnerships. Manifold said he would not make definite statements about which assets it may or may not sell, explaining that he wanted to maintain flexibility.
“We focus on where we see the maximum value creation in these businesses,” he said. “And I've talked at length this morning about particular regions. I've also been relatively quiet about other regions. So I'll let you draw your own conclusions with regard to the fact that what we may dispose of.”
The CEO noted that there had been some speculation surrounding the company’s search for a financial sponsor in relation to the UK assets, with KKR & Co. named in that capacity.
“I can confirm we are in discussions with them,” Manifold said. “But what we're doing is we're assessing with them exactly the timing of our investment in this business over the next few years and how we would balance where the United Kingdom is in the construction cycle, and with our desire to allocate assets to that particular part of the cycle and what size and scale.”
He said if CRH did take on a financial sponsor as a partner, it would retain flexibility to return to the assets at a later stage. The CEO stressed that the company would not make any commitments on the matter but would update the market when a decision was made.
Asked if his comments suggested a stake sale of the UK assets rather than a disposal of the whole business, Manifold said all options were being considered.
A published report following the deal announcement, citing Manifold, said CRH was in discussions with KKR about partnering on some of Lafarge/Holcim’s UK assets. An unsourced published report dated 25 January had said CRH was joining forces with the private equity firm to avoid its own competition issues, which would likely have arisen from a sole bid. The latter report noted that KKR was particular interested in the UK assets being sold, including Lafarge Tarmac, believed to have a GBP 1.7bn (EUR 2.3bn) valuation.
Regional strategy
The CEO outlined the importance of the various regional segments of the Lafarge/Holcim deal during his prepared remarks on the 2 February call. Manifold said there were four distinct regional platforms: North America, comprising the US and Canada; Western Europe, including the UK, France and Germany; Central and Eastern Europe, composed of Romania, Slovakia, Hungary and Serbia; and the Philippines and Brazil in the Emerging Markets.
In terms of the Western Europe operations, Manifold said its acquired assets in Continental Europe were primarily located in the north-eastern part of France, which complemented CRH’s existing significant investment in Belgium and the Netherlands. He said entry into the Southern German markets complemented its Switzerland-based businesses, the company’s most profitable country after the US. The CEO said having complementary assets north of the Swiss border was crucially important and gave it a strong advantage.
Manifold said CRH was acquiring a UK business with market-leading positions in cement, aggregate, asphalt and concrete, which would plug into the company’s Western European network of cement operations in Ireland, Spain, Belgium and the Netherlands.
In Central and Eastern Europe, the CEO said the acquisition would give CRH the opportunity to become one of the top cement players in Romania, the number one producer in Slovakia and number two in Hungary. He noted that this would complement its existing Polish and Ukrainian businesses and offer significant growth potential in the region. Manifold added that this new opportunity in Serbia would enable it to become the second largest cement company in a consolidated market and the largest heavy-side building material business in Central and Eastern Europe.
Finally, Manifold said CRH would look for opportunities to expand its presence in the coming year in the Philippines, a country that has a lot of barriers to entry and the best market in South Asia, along with Indonesia. He described the Brazilian assets as “a very solid business,” which it would assess going forward.
As previously reported, on the company’s 3Q14 sales and revenue call held in November 2014, the CEO said CRH would concentrate its M&A efforts on the US, with Europe also a key focus area. Manifold named Asia as part of the company’s medium- to long-term ambitions, adding that it did not expect to undertake “a multi-billion dollar play into the emerging regions now.”
Previous efforts
On Monday’s conference call, Manifold said the company had undergone a significant disposal program during the last year, having closed or agreed to deals generating around USD 900m of proceeds. He noted that CRH had sold these businesses at around 11x EBITDA and used the funds to reinvest in the company.
“And we will continue to deliver on that divestment program,” the CEO said. “When we overlay this portfolio (Lafarge/Holcim assets), that is on top of our existing portfolio of assets. We will go back and review our asset base with one eye on the future and one eye on value creation to see what the appropriate level of investment in the right regions and the right businesses at the right time of the cycle.”
CRH has made multiple disposals in the past five years, largely of European assets. In mid-December last year, the company sold the majority of its brickwork operations, including UK-based Ibstock and Pennsylvania-based Glen-Gery Brick to Bain Capital for EUR 522m. In November, CRH sold its ownership in Turkey-based cement and concrete businesses Denizli Cimento Sanayi ve Ticaret for EUR 321m.
CRH spent EUR 720m on 28 acquisitions in 2013, according to its annual report for the year. In September that year, the company completed its purchase of Lafarge’s Ukraine-based cement production company PJSC MykolaivCement for EUR 96m, one of its largest disclosed deals of the past half-decade prior to the Lafarge/Holcim transaction.
Advisory relationships
Davy Corporate Finance, Goodbody Corporate Finance, UBS Investment Bank, BofA Merrill Lynch and JPMorgan Cazenove are advising CRH on the Lafarge/Holcim deal.
For its earlier buys, the company has typically stayed in-house on the financial side, with in-country law firms used on several occasions.
CRH has used Royal Bank of Scotland for several disposals in the past half-decade, according to the Mergermarket M&A database. It used JPMorgan and Irish law firm Arthur Cox for its two most recent notable disposals. The latter was used for multiple earlier sales, with UK-based Simmons & Simmons also used on a number of deals. Linklaters was also retained for the brickwork operations sale.
On Monday’s call, CRH reported estimated net debt at year-end 2014 of around EUR 2.5bn, with its aggregated net debt post-transaction amounting to approximately EUR 7.5bn. The company has a market capitalization of EUR 17bn.
