Shares in CRH jumped to a two-month high on Thursday after it agreed to buy the US's fifth-largest cement company for $3.5 billion (€2.9 billion), which would better position the building materials giant to benefit from US president Donald Trump's infrastructure plan.
The deal to buy Kansas-based Ash Grove Cement Company was valued at a 59 per cent premium to the US company's closing price in New York on Wednesday. It comes hot on the heels of CRH's move last month to sell its lower-margin Americas distribution business for $2.63 billion to Beacon Roofing Supply, citing a lack of a visible route to market leadership in the sector.
CRH shares rose 3.3 per cent to close in Dublin at €30.92, giving it a market value of €25.9 billion.
“The acquisition of Ash Grove Cement meaningfully expands CRH’s cement production capabilities globally and is a significant expansion in the US,” said David Holohan, chief investment officer at Merrion Capital in Dublin.
“The deal terms appear quite rich and reflect the high earnings multiples that US cement producers trade on, which was previously a reason for CRH not to purchase US cement assets, citing the group’s history of not overpaying for acquisitions.”
Davy analysts estimated that CRH is buying Ash Grove Cement at a price equating to between 10.5 and 13.5 times the business’s earnings before interest, tax, depreciation and amortisation (ebitda), below the 16 times multiple it got for the Americas distribution it sold recently.
‘Recycling of capital’
“This effective recycling of capital should result in structural improvement in the group’s returns over time,” they said. “It is also investing in a business where it has significant synergy and growth potential.”
CRH shares soared more than 20 per cent between Mr Trump’s election last November and May on speculation that its US business would be among the main beneficiaries from the new administration’s plans to spend $1 trillion on infrastructure. However, the stock has fallen back from its highs in recent months amid concerns about Mr Trump’s ability to push the programme through.
CRH has played down the Trump effect, highlighting earlier this year that it is well placed, as the largest building materials group in North America, to benefit from the existing $300 billion-plus Fast Act highway spending programme as well as additional infrastructure spending approved by voters in a number of states in November.
The Ash Grove Cement deal is CRH’s biggest since its transformational €6.5 billion purchase in 2015 of assets hived off by European rivals Lafarge and Holcim to appease competition authorities as part of their own merger.
The newly-agreed transaction is subject to Ash Grove shareholder and regulatory approvals and will be financed through existing financial resources, CRH said. The transaction is expected to close around the end of the year.
Eight cement plants
Ash Grove operates eight cement plants across eight US states, combined with extensive ready-mixed concrete, aggregates and associated logistics assets across the US midwest.
For the year ended December 31st, 2016, Ash Grove reported profit before tax of $215 million and gross assets of $2.5 billion.
“Coupled with the sale of the Americas distribution business, Ash Grove will tip CRH’s portfolio further towards heavy building materials, which are more capital-intensive and exposed to construction cycles,” said ratings firm Fitch. “However, we believe that this is the result of opportunistic deal-making, rather than a long-term strategy shift. A complete transformation of the group into a heavy building materials producer is unlikely over the long term, as management is committed to maintaining a balanced portfolio mix.”
