Shares of Summit Materials (SUM 1.60%) were up 8% as of 11:30 a.m. ET on Thursday after the construction materials provider filed a preliminary statement with the Securities and Exchange Commission regarding its planned acquisition of the equity interests of Argos USA, including Cementos Argos.
Summit said it will finance the transaction with $1.2 billion in cash and 54.7 million shares of Summit stock. Following the transaction, Summit shareholders will own approximately 69% of Summit, with Cementos Argos owning the balance.
Why investors cheered the acquisition of Cementos
Summit shares are up 21% year to date, but this acquisition could be a major growth catalyst once the deal closes sometime in the first half of 2024.
In September, Summit originally said the move would create a business with about $1 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA). Free cash flow per share would increase by 15% to 25%.
The new company would significantly expand its market leadership in cement, especially in fast-growing markets that have stable revenue year-round. Both businesses were already leaders in the cement space but could gain significant benefits from greater scale and lower costs by joining forces.
Summit is positioning itself for profitable growth
Over the last three years, Summit has slightly improved revenue but free cash flow has been cut in half. However, management has focused on improving its financial position.
In August, the company announced an agreement with affiliates of Blackstone to eliminate certain payments as part of a Tax Receivable Agreement. This saves Summit $256 million it would have paid through 2039.
Moreover, management credited recent pricing actions and a more robust demand environment for better margin performance in the second quarter.
Rising interest rates are a headwind to construction activity, because it increases the cost of materials, so the timing of this deal could help mitigate a slower demand environment and firm up profits. These moves could benefit Summit stock over the next few years.
