There was no shortage of excitement in the realm of mergers and acquisitions for the aggregates industry during 2007. Some major multi-billion-dollar deals went through, as major players continue to brace for hard times. These deals may have some repercussions throughout the industry, explains Martin Burhans, managing partner of Heart Land Resources, which provides strategic and financial solutions for privately held companies in the heavy building materials industry.

CEMEX ACQUIRES RINKER

The most renowned deal last year was Cemex's hostile takeover of Rinker Materials. Simply put, Cemex made an offer Rinker couldn't refuse, $14.2 billion, despite persistent efforts by Rinker to reject the deal. And this deal comes only 18 months after the purchase of RMC, which was approximately a $5.8 billion deal.

“Now (Rinker) may say that the board approved it in the end, … but it was hostile the whole way. Rinker was not wanting to be sold to Cemex,” Burhans says. “They were forced into the position because Cemex offered so much money for the stock that in the best interest of the stockholders Rinker couldn't say no.”

This may have some impact on cement transactions. Burhans says Cemex is renowned for Cemex-only cement for internal operations, and he expects more vertical integration of cement sales. Cement companies that were regularly selling to Rinker will now have to readjust their customer bases and find new business.

What's more, North American cement companies no longer are pressed with anti-tariff laws on Mexican imports. Burhans adds that Cemex easily could turn to its monopolized source south of the border. This shift in sales could have a negative impact on cement pricing in select markets. Burhans expects increased right sizing on the Rinker side of the business.

It also is likely that there will be a reassessment of Cemex's strategy. The company will likely continue efforts to divest certain properties from the Cemex deal. Already, Cemex has been required by the Department of Justice to divest assets in Florida and Arizona.

HEIDELBERG ACQUIRES HANSON MATERIALS

The largest sale made in 2007 was Heidelberg's acquisition of Hanson Materials for $15.8 billion. This was a much more friendly negotiation, more of a merger than an acquisition, Burhans says. It just made sense for both companies. Combined, these companies employ about 70,000 people across five continents. This deal comes shortly after Hanson's $300-million acquisition of Material Service, a major player in the Chicagoland market.

But like the Cemex-Rinker deal, there is anticipated downsizing or right sizing needed. This represents an effort to recover synergies promised to the investment community, Burhans says. Jim Kitzmiller, a gifted right sizer, was appointed CEO of the four North American divisions in November 2007, thus postponing his retirement until 2010. Also, Dan Harrington at that time was appointed COO, possibly to assume the CEO role in 2010 when the process is completed, Burhans says.

VULCAN MATERIALS ACQUIRES FLORIDA ROCK

Possibly as a strategy against a hostile takeover, Vulcan Materials acquired all of Florida Rock. Burhans says that Vulcan may have been on the radar of some of the multinational companies during the last few years. “They were all rumors,” he says. “But where there is smoke, there's fire.”

Vulcan paid an aggressive price for Florida Rock, according to Burhans. It is the second largest aggregate, cement and ready-mixed concrete producer in Florida and a publicly traded company that was operated by a family that drove a hard bargain.

Vulcan, however, will suffer in the short term because of the state of Florida. Burhans says the Florida market is down 30%, and may take years to fully recover. However, Vulcan has always had an upper hand, owning some of its own ships for imports into the Gulf Coast (including Florida), which is an increasingly valuable asset since a judicial fiasco occurred in the Miami-Dade area.

In Florida, Judge William Hoeveler has ruled against the rock mining industry in support of environmental groups. Sierra Club and others are suing to stop mining on more than 5,000 acres of wetlands, arguing that it is a threat to drinking water supplies. The Miami-Dade area is the largest source of high-quality aggregate in the state. Any long-term disruption to this resource could potentially cripple the local construction industry.

BIG PLAYERS IN 2008

Already there has been some major acquisition activity for 2008 with Lafarge's purchase of Orascom, which owns and operates cement plants in Egypt and Algeria; its combined annual production capacity is 13.5 million tons. Burhans says impacts from this deal have yet to be realized, but Lafarge will grab a strong foothold on emerging markets in Southwest Asia and Mediterranean countries. Also, the seller President Nassef Sawiris will likely have a strong influence through his holdings in other U.S. corporations including 11.6% of TXI, 8.8% of Martin Marietta Materials and 11.4% of Lafarge.

Other activity likely will emerge as the U.S. dollar continues to decline in relation to the Euro. A low dollar value will entice European countries to invest in the United States. Burhans advises interested parties to watch the large cement holding companies such as Holcim, Lafarge and CRH Oldcastle.

Heidelberg and Cemex, however, may be sitting on the sidelines this year. Burhans says that Cemex has been pushed to the limit with its Rinker deal. And Heidelberg will be sorting out its business divisions (right sizing) and dealing with several undercapitalized Hanson assets.

Vulcan may be safe for awhile because of its cooperative deal with Florida Rock, although the market and aggregate availability in Florida may be a deciding factor as well as the reduced market caps for Vulcan. Burhans says that Vulcan also may be restricted to accretive growth and focus on internal activities.

Another company that Burhans says is at least momentarily safe from being bought out by companies looking to profit from our poor economy is Martin Marietta Materials. Its stock value remains very strong.

“(Like Vulcan nationally and other regional players), they have a real strong position in all of the markets,” he says. “They have real sharp people, and they are the leaders in distribution networks that they continue to develop.”

SOME FINE TUNING IN STORE

Major producers in the United States also will be looking at asset swaps as part of the right sizing and continue with further vertical integration efforts. Constraints will be felt during the continued economic downturn, and companies will focus more on internal asset management. Less capital will result in less merger and acquisition activity. Smaller private companies, however, may be looking to get out and sell during these tough times.

Also, right sizing activities will challenge many of these companies to maintain value stability of their products while improving operations and inventory control, Burhans says.

Overall, 2008 should be a slow year, especially in comparison to the major acquisitions of 2007. A roundup of activity that Rock Products picked up on in 2007 is included in the chart on page 68.

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Martin Burhans has 25 years of senior management experience in the heavy building materials and bulk transport businesses. His advisory firm Heart Land Resources offers business unit leaders, managers and owners strategic growth and strategic management opportunities involving capital projects, acquisitions or divestitures for right sizing and growth.