It seems that nary a day passes, in our progressively more frantic world, that there isn't an announcement of a planned merger or an effort to effect some sort of corporate combination or restructuring. You Fools are smart and up-to-speed on the market's machinations, and so you don't need specific examples.
The cement industry is not an exception to this expanding truism. In fact, cement assets have been changing hands for years in something of an under-the-radar expatriation movement, but because cement isn't technology, or retail, or even a public utility, there remains minimal focus on the industry's activities and its changes.
To be sure, last week when Vulcan Materials (NYSE:VMC) agreed to buy Florida Rock Industries (NYSE:FRK) at a not insubstantial multiple, the markets figuratively opened one eye, and cast a quick glance at another almost-dormant cement bid. Vulcan is the largest domestic producer of construction aggregates, a fancy name for crushed stone, gravel, and sand. Florida Rock operates a single cement plant and also produces aggregates, ready mix concrete, concrete blocks, and other building materials.
The powers that be at Vulcan are willing to pay about 11.3 times forward EBITDA (earnings before interest, taxes, depreciation, and amortization) for Florida Rock, significantly more than the 8.8 times EBITDA represented by Mexican cement producer Cemex's (NYSE:CX) longstanding $12 billion bid for the assets of building materials producer Rinker Group (NYSE:RIN). Rinker, which is based in Australia, generates about 85% of its earnings in the United States.
During the past few decades, a progressively larger share of U.S. cement assets have become foreign owned. At the same time, domestic demand for cement has been buoyed by a series of federal highway bills, the latest of which was signed into law in 2005, and will result in the spending of about $285 billion over the next half-dozen years on highways across the nation. Somewhat as a result, even when operating near their rated capacities, U.S. cement plants in the aggregate can only produce about three-fourths of the nation's demand.
All this leads me to recommend that Fools direct at least a modicum of attention to three companies. The first, probably not surprisingly, is Rinker. In my opinion, the Vulcan-Florida Rock deal at least calls into question the adequacy of the Cemex bid for the company. On that basis, it seems entirely possible that either Cemex will sweeten its bid for Rinker, or another suitor will arrive to take Rinker's hand.
The other two companies that I believe deserve Foolish attention are both based in Texas: Eagle Materials (NYSE:EXP) and Texas Industries (NYSE:TXI). Eagle once was part of homebuilder Centex's (NYSE:CTX) repertoire, and operates four cement plants in places like Buda, Texas, and LaSalle, Illinois. It also is a producer of gypsum wallboard. For its part, in recent years Texas Industries has cleaned up both its cement assets (the company operates two plants each in California and Texas) and its corporate structure. In the latter area, two years ago it jettisoned a steel operation that, while sound, wasn't really synergistic with cement.
With environmental regulations making the construction of new cement plants problematic, these companies possess progressively more attractive assets and, I believe, should be watched closely by the Foolish nation.
For related Foolishness:
Cemex is a Motley Fool Stock Advisor recommendation. You can find out why with a 30-day free trial to the Gardner brothers' market-beating service.
Fool contributor David Lee Smith does own shares in Centex, but not in the other companies mentioned. He welcomes your questions or comments. The Fool has a disclosure policy.
