The way has been paved for Mexican cement manufacturing giant Cemex (NYSE: CX) to up the ante in its bid to acquire Australian building materials maker Rinker Group (NYSE: RIN). That, at least, would seem to be a logical conclusion following Rinker's rejection last week of Cemex's $12 billion takeover bid.
In rebuffing Cemex, Rinker officials said they believed the company is worth 40% more than the bid. This contention apparently was based in part on a report by Australian investment firm Grant Samuel. Rinker, which gets about 85% of its earnings in the U.S., has been hurt somewhat by softening housing markets in Florida and Arizona.
For its part, Cemex continues to buy and sell cement assets worldwide as management tries to hone the company and generate growth. One of its most significant purchases was completed in 2001, when it acquired Houston-based Southdown Corp., then one of the largest players in the U.S. cement market. Earlier this year, however, Cemex pulled out of Indonesia by selling its 25% interest in Semen Gresik after encountering tough going in that developing nation. In addition to its United States assets, Rinker would give Cemex an entry into Australia while also opening the door to China, where Rinker operates four plants.
In the U.S., where cement capacity now is about three-fourths foreign-owned, cement demand has been buoyed in the past two decades by a series of sizable highway bills. The latest iteration of the bill, which was passed by Congress and signed into law last summer, will result in federal road and related safety spending totaling about $285 billion over the next half-dozen years. Nevertheless, domestically owned cement manufacturers have been reduced to the likes of Eagle Materials (NYSE: EXP), with four plants, and Florida Rock (NYSE: FRK), with one.
I agree with Foolish colleague Selena Maranjian, who recently gave you her positive assessment of Cemex. As she told you, the company achieved a 23.5% return on equity in 2005, and its share price has appreciated an average of more than 20% annually since it became listed on the New York Stock Exchange in 1999. And yet, the company trades at a forward P/E ratio of less than nine, and its five-year PEG ratio (the P/E divided by the expected growth rate) is only 0.93.
While the mating dance is almost certainly not finished for Cemex and Rinker, I believe that Cemex, with its size, geographic diversity, and strong management, is as solid a company as Foolish investors are apt to find in the international sector.
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Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your comments or questions.
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