Irish building materials group CRH is no stranger to making acquisitions but its planned €6.5 billion purchase of assets from the Lafarge/Holcim global merger will test its management capability like never before.
At a conference some years ago, I listened to CRH's then finance director Harry Sheridan explain to the audience how the Clondalkin-based building materials company had specialist teams scattered around the world constantly scouting for deals. It employed more than 50 investment bankers at the time.
On average, it was acquiring a rival business every fortnight, somewhere in the world. It’s an incredible statistic when you consider how most companies wrestle with the complexities of integrating a single acquisition once in a blue moon.
The CRH deals were mostly bolt-on acquisitions, a lot of small transactions that when added together would usually account for a €1 billion-plus annual spend.
This deal is an animal of a completely different colour. It’s the equivalent of three years spending in one transaction.
War chest
CRH has actually been a net disposer of businesses in the past couple of years as it built up a €2 billion war chest so that it could capitalise on this very opportunity.
Based on share trading yesterday, investors liked the look of the deal. The stock closed up 0.4 per cent in Dublin at €23.06, having traded over 3 per cent higher earlier in the day.
And that was after a €1.6 billion share placing on Monday at €21.85 a share to part-fund the acquisition. It equated to a whopping 9.9 per cent of the stock in issue before the placing.
One trader said it was a case of “hats off” from investors to CRH for pulling off the deal, which will see it move from sixth to third in the global rankings of building materials groups.
Presuming that the anticipated €90 million in synergies are achieved within three years, Davy estimates that the deal will be 25 to 30 per cent “accretive to earnings on a full-year basis”.
The transaction has many attractions. It gives CRH a strong pipeline of cement for its operations at a time when it has had to buy supply from third parties in Europe and North America. It gives it an entry to important emerging markets such as the Philippines and Brazil, and it bolsters its position in North America, the UK, France and Germany.
It coincides nicely with US president Barack Obama’s plans to tax the overseas profits of US companies in a bid to part-fund a six-year $478 billion upgrade of bridges and motorways across the country. CRH would hope to carve out a sizeable slice of that cake.
The cost of debt is attractive, too, going from a current weighted average cost of about 4 per cent to 3 per cent by 2020. If you go back to 2012, its debt interest costs averaged more than 5 per cent.
The operations it is acquiring generated revenue of €5.1 billion and earnings before interest, tax, depreciation and amortisation of €752 million in 2014.
However, there are risks to the deal. Analysts at Citi cited six in its report on the transactions: a petering out of the US recovery, a prolonged recession in Europe as governments cut spending, weak US state spending on highway construction and other infrastructure, a lack of acquisition opportunities or the group having to pay higher prices for acquisitions, and currency risk if the US dollar weakens.
Assets for disposal
The other is management not delivering on disposing assets identified for sale. Some €1.4 billion worth of assets are earmarked for disposal to bring its debts costs down.
There is also execution risk. The possibility that CRH simply doesn’t have the management “heft”to successfully pull off such a large deal.
“In addition to the slightly high price tag, we think that there is substantial execution risk – notably the group’s capacity to achieve divestments – while the geographic mix remains less attractive than that of the other groups in our sample,” said Oddo Securities in a note to clients after the acquisition.
On Monday, CRH chief executive Albert Manifold, who is just 13 months in the job, said he was "very confident" that CRH had sufficient management capacity to make this transaction a success. One way or another, it is a deal that will define his stewardship of the €17 billion business.
