Now a half-decade into the punishing economic downturn that has pushed many construction-related materials companies toward the brink, the two largest aggregate suppliers in the United States finally appear set to combine forces.
The idea of a business combination between Vulcan Materials (NYSE: VMC ) and Martin Marietta (NYSE: MLM ) had been tossed around for quite some time, but Vulcan "disengaged" from talks earlier this year without striking a bargain. Accordingly, Martin Marietta has opted to take its offer straight to Vulcan's shareholders, complete with sweet enticements like a pledged 20-fold increase in the dividends presently paid by Vulcan.
The hostile bid proposes to exchange each Vulcan share for 0.5 share of Martin Marietta, creating the world's largest supplier of aggregates (crushed stone, sand and gravel, etc.) and a pro forma market capitalization of about $7.7 billion. Because the two companies share such similar product mixes and structures, Martin Marietta expects the combination to yield annual cost savings of $200 million to $250 million. Even without the prospect of a 20-fold dividend increase, that enhanced efficiency makes a compelling case for Vulcan shareholders to support the combination.
Vulcan does not find itself in a particularly strong position from which to fend off the advance. The company is marred by substantial net debt at 8.9 times trailing EBITDA, while the pro forma entity would cut that figure in half once cost synergies are taken into account. And although neither company has suffered the degree of devastation that has slammed the shares of cement giant Cemex (NYSE: CX ) or wallboard manufacturer USG (NYSE: USG ) , Martin Marietta has emerged as the strong relative outperformer over its larger rival Vulcan. Nonetheless, they have all failed to outperform the mere 13% dip in the S&P 500 (INDEX: ^GSPC ) over the past five years. Have a look at the following five-year chart:
With a reminder that challenging business conditions show no signs of abating, Martin Marietta Chairman and CEO C. Howard Nye added: "Recent events, including the fragile state of the U.S. economy, the lack of visibility as to when a sustainable recovery will take place, and the uncertainty surrounding government spending on infrastructure projects, only strengthen the rationale behind a combination." There can be little doubt that the proposed combination will yield a company better equipped to withstand and adapt to protracted weakness in demand for aggregates.
I continue to recommend that investors keep their strategic distance from the producers of construction materials until the relevant market conditions signal a convincing about-face, though I continue to track the entire domestic industrial sector carefully for early signs of sustainable improvement. I regularly review trusted commentary from Nucor (NYSE: NUE ) CEO Dan DiMicco and recent takeover target Commercial Metals (NYSE: CMC ) , and I concur with Martin Marietta that sustainable recovery in most segments of American industrial demand remains nowhere in sight. Nonetheless, I am inclined to view the pro forma company resulting from the proposed share transaction as "best in class" among the producers of bulk construction materials, and I intend to track the company's performance by placing the stock on My Watchlist.
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