Let's dig into the nuts and bolts of the unannounced offer Cemex
Cemex has offered A$17 ($13) per Australian share, or $12.8 billion, for fellow aggregate, cement, and ready-mix company Rinker. Each Rinker ADR equates to five local shares, so the offer prices Rinker at $65 per ADR. This makes the offer approximately 21.7% above Thursday's closing price, but with Rinker's shares currently trading above $71, the market is making a strong statement that another offer is likely or that Cemex will need to up its bid.
This morning, Rinker announced that it's not keen on the offer from Cemex, calling it opportunistic and saying it undervalues the company. That said, the offer was still substantially above any recent closing price for Rinker, and Rinker did not go so far as to reject the offer outright. If I had to guess, I'd say these two companies will be doing some talking in the coming days and working toward common ground.
Cemex's offer is an all-cash offer. In other words, Rinker shareholders will receive cash and not Cemex shares. Cemex is financing the deal entirely with debt, and has already lined up the financing with a few banks. As the deal is currently stated, Cemex believes it would immediately add to free cash flow and would help reduce volatility in the company's cash flow overall. After the acquisition, the company anticipates that it will still have an interest coverage ratio (earnings before interest and taxes/interest expense) of 4.5, and that within two years the company would be back at its targeted level of net debt-to-EBITDA of 2.7.
While I understand Rinker pointing toward its robust growth rates of the last five years as reasoning for its belief that the offer undervalues the company, I'd argue that growth rates over the last five years haven't been entirely normal. Given the market's reaction, the expectation is that the deal will be sweetened. We'll just have to wait and see.
The combined company would have a very strong position in the U.S., in particular in rapidly growing areas such as Arizona and Florida. From a product mix perspective, the aggregate reserves (reserves of sand plus gravel) that Rinker brings to the table are valuable, and the combined company would be the largest seller of aggregates in the world. There is a concern that Cemex will take on a bit too much leverage just as the U.S. economy slows down. The company feels confident that the long-term benefits of the transaction at this price outweigh the potential short-term problems from any slowdown in building activity, but it is nonetheless a risk investors need to consider.
The final item to consider while looking at this deal is that acquisitions are not foreign territory for Cemex. By all measures, the company's acquisition of Southdown in 2000 and RMC in 2005 have been successful and have added value for shareholders. On the surface, it appears this deal will do the same, and while Cemex insists the deal is about creating value and not about creating size, I have to think the folks at Lafarge
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