On Monday, Mexican cement tycoon and Motley Fool Stocks 2003 pick Cemex (NYSE:CX) dropped a 70-lb. bag of quick-set on the market: It has agreed to pay $4.1 billion to acquire Britain's RMC (and yes, that's a rock company, too). Along with RMC will come two other things: $1.7 billion in RMC's debt that Cemex will assume, and yet another entrée into the booming U.S. construction market, via RMC's Decatur, Ga.-based "RMC Industries" subsidiary.
Despite Cemex's assurance that the acquisition would immediately translate into both increased free cash flow and increased earnings, the market was less than impressed by the buy, slashing 6% from Cemex's share price. Let's take a look at why.
RMC had $7.8 billion in sales in 2003 but earned just $115 million in profits from those sales (a 16% decline in profitability over its 2002 numbers despite an 8.7% increase in sales). And all that was before accounting for one-time costs, including some pretty massive restructuring costs incurred last year. Add those costs back into the mix, and RMC posted a net loss of $280 million for 2003. In comparison, Cemex had just $7.2 billion in revenue last year but dropped $630 million of that to the bottom line and grew sales by nearly 10% (and income more than 20%).
Numbers like those explain how it was Cemex that had the money to buy RMC and not the other way around. The question that should be asked, however, is why Cemex bothered. Of the two, it's by far the leaner, more profitable, and faster-growing company.
The answer that the market imputed to that question, it seems, is that Cemex overpaid in a quest for growth for growth's own sake. Cemex's bid, after all, is 43% over Friday's closing price for RMC. That's a pretty hefty premium to pay for a slow-growth cement and aggregates business. The acquisition, if it goes through, will have the effect of making Cemex the No. 2 cement company in the world. Its combined $15 billion in annual turnover will fall just short of current cement king Lafarge S.A. (NYSE:LR), which boasts $17 billion in sales. But Fools know that bigger is not always better.
Don't take cement for granite. Read the following Foolish stories on Cemex, and get the whole story:
Fool contributor Rich Smith does not own shares of any of the companies mentioned in this article.
