Consolidation Is Hot in Cement
May, 15 2007
(Motley Fool) -- Consolidation is the hot trend in the cement industry. The acquisition of Rinker (NYSE: RIN) by Stock Advisor selection Cemex (NYSE: CX) is finally on terms acceptable to both parties, and today two other large global players in the cement business, HeidelbergCement and Hanson (NYSE: HAN), announced they're going to hook up as well.
HeidelbergCement, based in Germany, will pay approximately 8 billion GBP ($15.9 billion) for Hanson, and the boards of directors at both companies have approved the deal. From a valuation perspective, HeidelbergCement is paying a little bit more than 12 times EBITDA (earnings before interest, taxes, depreciation, and amortization). This is slightly higher than the 10.5 times EBITDA that Cemex is set to pay for Rinker.
Hanson, like Rinker, is a large provider of aggregates (crushed rock, sand, gravel, etc.), but unlike Rinker, it is also a provider of building materials such as tiles and bricks. The combined Hanson and HeidelbergCement will be the second-largest company in the industry on a market-cap basis. Market caps are always moving, but taking a quick look at some of the larger competitors, it appears that Lafarge (NYSE: LR), with a $30 billion market cap, is the only company that would be larger, and that the combined company is just slightly larger than the current $25 billion market cap of Cemex.
Like the Cemex deal, the Hanson deal provides geographic diversification for HeidelbergCement. But in the long term, the consolidation in the industry is about scale and potential efficiency gains, and ultimately, greater consolidation should lead to more pricing power for the remaining parties. That's a plus in the long term, even if the short-term outlook for cement growth in developed economies isn't very strong.
By Nathan Parmelee
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