Cemex acquisitions

TB0491

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Michael H. Moffett

CEMEX and the Rinker Acquisition (B) On April 9, 2007, the board of The Rinker Group Ltd. (Australia) approved a revised offer of US$15.85 per share after CEMEX S.A.B. de C.V. (NYSE: CX)—CEMEX—raised its offer 22%.1 With the backing of management, CEMEX obtained the needed 90% of shareholders’ approval on July 10, 2007, to close the acquisition of Rinker. CEMEX funded the acquisition nearly exclusively with short-term debt, in line with its proven acquisition process. This time, however, the combined purchase price and debt financing would both prove a challenge to CEMEX for years to come.

The Rinker Deal In the weeks and months that followed, many analysts debated whether CEMEX had overpaid for Rinker. One investment bank that followed CEMEX closely, Santander, still supported the acquisition:2

Although CEMEX has had to increase its offer price for Rinker, we believe that the acquisition is still potentially accretive for CEMEX, and that the resulting valuation is still attractive. In fact, applying a conservative estimate for CEMEX’s synergies of US$130 million per year to our sensitivity model would imply a year-end target price of US$37.60 per ADR, representing a potential upside of 7.0% from current levels, plus a 2.0% expected dividend yield in 2007. However, we believe that there may be additional upside in terms of the potential synergies, once the due diligence is completed. CEMEX management stated that there are potential savings in areas such as: capex; working capital; and taxes; although they have not been able to quantify this potential as yet. Our buy rating for stock in CEMEX remains unaltered.

CEMEX believed the Rinker acquisition had a number of strong business benefits, arguing that the deal expanded its diversity and strength in the aggregates and ready-mix concrete components of the concrete value chain. It also increased CEMEX’s market share in several of the key growth markets in the U.S. marketplace, namely Florida and Arizona. Although not as important, the added business segments in Australia and China expanded CEMEX’s global reach. The combining of CEMEX and Rinker operations in the U.S. market would also offer significant cost synergies (CEMEX had expanded its estimate to more than US$400 million in potential cost synergies in 2008). As described in Exhibit 1, CEMEX defended the Rinker deal as meeting all of the company’s corporate objectives demanded of all acquisitions.

CEMEX was a seasoned professional when it came to financing acquisitions. The company had paid down its net debt (debt less cash) from US$10.4 billion to just US$5.1 billion in the two years leading up to the Rinker purchase. The acquisition would be financed entirely with debt—US$14.2 billion, and would also require CEMEX to assume US$1.3 billion of Rinker’s existing debt obligations. Lorenzo Zambrano pledged to reduce CEMEX’s total net debt to under 2.7 times its EBITDA within two years.

“The combination of CEMEX and Rinker will create value for shareholders as well as customers, particularly in growth regions in the United States,” said Lorenzo H. Zambrano, CEMEX CEO and chairman, in a statement. “We intend to regain our financial flexibility as soon as possible and return to our steady state capital structure within two years.

Lorenzo H. Zambrano, Chairman and CEO, CEMEX.

1 CEMEX agreed not to adjust (lower) the offer price as a result of the dividend paid by Rinker at the end of 2006 to all shareholders. Arguably, immediately following the payment of the dividend, Rinker’s enterprise value would theoretically fall by the amount of the dividend. 2 “CEMEX: CEMEX Increases Its Offer for Rinker by 22%,” Santander Investment, Mexico City, April 10, 2007, p. 1.

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2 A02-17-0008

The combined firms would, however, reduce competition in specific markets according to the U.S. Department of Justice (DOJ). As a result, the DOJ filed suit to stop the acquisition. The DOJ argued that the acquisition would lessen competition and create a monopoly in interstate trade and commerce in violation of Section 7 of the Clayton Act. The court found in favor of the U.S. Department of Justice on August 31, 2007, requiring CEMEX to divest a number of the acquired properties in the impacted Florida and Arizona markets. Despite shedding these selective units, the acquisition was completed.3

Despite the closing of the Rinker acquisition in the summer of 2007, the merits of the deal continued to be debated. Analysts focused on three dimensions: (1) had CEMEX overpaid; (2) the acquisition would significantly increase CEMEX’s exposure to the U.S. housing market, which generated 50% of Rinker’s revenues; and (3) CEMEX’s debt would rise significantly—again—which could lead to credit concerns.

CEMEX’s Acquisition Process CEMEX used the same acquisition process with Rinker as it had used so successfully time after time.