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The Deal Goes Down


 
Martin Marietta Materials Inc. and Texas Industries Inc. (TXI) MergeTHE MERGER OF MARTIN MARIETTA MATERIALS AND TEXAS INDUSTRIES CREATES A CONSTRUCTION-MATERIALS JUGGERNAUT.

By Mark S. Kuhar

The biggest merger news in years hit the aggregates industry in January. Martin Marietta Materials Inc. and Texas Industries Inc. (TXI) announced that the boards of directors of both companies had unanimously approved a definitive merger agreement under which Martin Marietta will acquire all of the outstanding shares of TXI common stock in a tax-free, stock-for-stock transaction.

The $2.7-billion deal will create a “market-leading supplier of aggregates and heavy building materials, with low-cost, vertically integrated aggregate and targeted cement operations,” the companies said in a combined statement. With greater geographic and product diversity and a leading distribution network, the combined company will have uniquely positioned assets across some of the nation’s largest and fastest growing geographies, such as Texas and California.

Delivering Value
Ward Nye, Martin Marietta’s president and chief executive officer said, “By uniting Martin Marietta’s and TXI’s complementary assets and leveraging an expanded geographic footprint, we will be even better-positioned to deliver value to our shareholders and customers. TXI’s aggregates operations are strategically located in high growth markets and fit well into our existing portfolio, and its cement operations will further diversify our product and customer mix. Through the significant investments TXI has made in plant modernization and capacity expansion, it has achieved leading positions in some of the nation’s highest growth markets while maintaining a low cost profile. As a result of this combination, we will be poised to capitalize on the strength of our combined aggregates platform as well as the significant upside potential in the infrastructure, residential and nonresidential construction segments. We are confident that combining our companies will accelerate our ability to increase sales and cash flow and improve margins. We are excited about the opportunities ahead and look forward to quickly realizing the benefits of this transaction.”

Mel Brekhus, TXI president and chief executive officer, said, “Combining with Martin Marietta represents a unique opportunity to create a more competitive company with a solid, diversified portfolio of assets, enhanced credit profile and a strong balance sheet. We are confident that we have found the right partner. This combination will advance our growth objectives, deliver significant value to all of our stakeholders, and allow shareholders to participate in the combined company’s potential growth and value creation. In addition, we are pleased that, through this combination, our shareholders will enjoy a strong dividend distribution. This transaction will create a larger, stronger entity with enhanced career and professional development opportunities for employees. I look forward to working closely with Ward and the proven management teams of both companies to complete the transaction quickly and to ensure a smooth transition.”

Martin Marietta Materials had a robust fourth quarter. Versus last year’s fourth quarter, the company reported:

  • Earnings per diluted share of $0.77 compared with $0.46.
  • Consolidated net sales of $491.4 million compared with $456.0 million.
  • Aggregates product line pricing increase of 3.4 percent; volume decline of 0.4 percent.
  • Specialty Products record net sales of $58.1 million and record earnings from operations of $20.4 million.
  • Consolidated earnings from operations of $62.8 million compared with $40.2 million.

 

For 2013 versus 2012, the company is reporting:

  • Earnings per diluted share of $2.61 compared with $1.83 (2012 includes business development expenses of $0.46 per diluted share).
  • Net sales of $1.943 billion compared with $1.833 billion.
  • Aggregates product line pricing up 3.0 percent; volume flat.
  • Specialty Products record net sales of $225.6 million and record earnings from operations of $73.5 million.
  • Consolidated gross margin (excluding freight and delivery revenues) of 18.7 percent, up 90 basis points.
  • Consolidated SG&A up 10 basis points as a percentage of net sales.
  • Consolidated earnings from operations of $218.0 million compared with $156.2 million.

 

TXI did not fare as well, as 2013 came to a close. The company reported financial results for the quarter ended Nov. 30, 2013, as a net loss of $17.6 million or $0.62 per share. Year-over-year results were a net loss of $11.1 million or $0.40 per share.

Aggregates operating profit for the three-month periods ended Nov. 30, 2013, and year-over-year was $5.4 million and $3.5 million, respectively. Total segment sales for the three-month period ended Nov. 30, 2013, were $42.6 million compared to $40.2 million for the prior year period.

Stone, sand and gravel sales increased $4.2 million from the prior year period on 0.8 percent higher shipments and 14.1 percent higher average prices. Average selling prices increased primarily due to the impact of product and geographic mix associated with the aggregate terminals acquired in the asset exchange on March 22, 2013. Shipments during the period were negatively impacted by more inclement weather in Texas compared to the prior year period.

Looking Ahead
Martin Marietta is now positioned to become the nation’s largest producer of construction aggregates. The addition of TXI will add approximately 800 million tons of aggregates reserves, bringing the total to over 13.5 billion tons. TXI shipped nearly 15 million tons of sand, gravel and crushed stone during fiscal year 2013. TXI is a major supplier of aggregates in high-growth markets such as Texas, and has long-focused on the synergies available from operating in aggregates as well as cement and ready-mix.

With vertically integrated operations across aggregates and targeted cement, the combined company is expected to be even more competitive. TXI increases Martin Marietta’s presence in the Southwest, with state-of-the-art cement production facilities concentrated primarily in Texas and California – two of the largest and fastest growing markets for construction materials in the United States.

The increased scale and geographic diversity resulting from this transaction will provide a broader set of opportunities for organic and inorganic growth. In addition, select vertical integration will improve distribution and transportation costs, diversify end-markets and drive other value enhancing efficiencies. The combined company will also have an outstanding asset base that can deliver superior product offerings and service to customers.

The combined company will maintain a strong balance sheet with significant cash flow, giving it the ability to pay a meaningful quarterly cash dividend. The combined company intends to maintain the dividend at Martin Marietta’s current rate of $1.60 per Martin Marietta share annually, equivalent to $1.12 per TXI share annually, based on the proposed exchange ratio.

Final Caution
There is also an outside chance that the deal could fall though. If the federal government decided to impose conditions that would have an adverse effect on the company, causing it to abandon the deal, Martin Marietta could have to pay a termination fee of either $25 million or $140 million to TXI, depending on the circumstances. Most analysts, however, predict the deal is solid and will go through.