IN THIS EXCLUSIVE ANALYSIS PREPARED FOR ROCK PRODUCTS, HEADWATERS MB LOOKS AT CURRENT MARKET TRENDS SUCH AS MERGERS AND ACQUISITIONS, AGGREGATE PRODUCTION AND PRICING.

Public Valuations

In Q3 2016, average EBITDA multiples for the publicly traded aggregates industry increased 0.8 percent and average EBITDA margins during the period increased from 19.3 percent to 20.0 percent compared to Q2 2016 (Figure 1, includes the constituents of Headwaters Aggregates Materials Index). Year over year, EBITDA multiples were 6.2 percent lower than in Q3 2015 but that is an improvement from Q2 and multiples are trending up.  What is interesting is while EBITDA margins have expanded by 3.0 percent over the past year, valuations have tightened reflecting investor’s conservativism in predicting the length of the current construction cycle. The publicly traded aggregates industry was trading at an average EBITDA multiple of 11.1x at the end of Q3 2016.

Source: FactSet

Aggregates Performance

In 2016, publicly traded aggregates producers are outperforming the S&P 500 and the Dow Jones Industrial Average (DJIA) (Figure 2) with a 33.0 percent YTD return as of September 30, 2016. As of November 30th, publicly traded aggregate producers had a YTD return of 47.6 percent with 12.9 percent of the YTD return coming in the wake of Donald Trump’s election and the resulting shock to financial markets. Vulcan Materials experienced a 10.0 percent rise on Wednesday, November 9th, the largest one-day increase since the stock debuted in 1972 and Martin Marietta Materials posted a 12.0 percent gain Wednesday, its largest since going public in 1994. [1]

 

Select Merger & Acquisition Activity

Acquisition activity increased in Q3 2016 as aggregate producers acquired mineral reserves and completed strategic acquisitions to increase vertical integration and geographic expansion (Figure 3). HeidelbergCement and U.S. Concrete were active consolidators during the quarter while LafargeHolcim divested of several large international assets.

Figure 3: Q3 Industry M&A Activity

Transaction Date

Target/Issuer

Buyers/Investors

Transaction Value ($mm)

09/30/2016

Granite Source Inc.

Clio Holdings, LLC

Undisclosed

09/30/2016

Italcementi SpA

HeidelbergCement AG                         (acquired remaining 55% stake)

          6,473.4

09/16/2016

Swenson Granite Company LLC

Polycor Inc.

Undisclosed

9/12/2016 

Cemex Construction Materials Atlantic,  Fairborn Cement Plant and Related Assets

Eagle Materials Inc.

             400.0

09/06/2016

Fabcon Incorporated

Platinum Equity

Undisclosed

08/23/2016

C & A Paving Co., Inc.

Clements Concrete Co

Undisclosed

08/22/2016

Kings Ready Mix Inc.

U.S. Concrete, Inc. 

Undisclosed

08/19/2016

H.C. Rustin Corp.

Summit Materials 

Undisclosed

08/18/2016

HeidelbergCement, Cement plants in the US

Cementos Argos S.A.

             660.0

08/10/2016

Jenna Concrete Corporation

U.S. Concrete, Inc. 

Undisclosed

8/4/2016  

LafartgeHolcim Vietnam

Siam City Cement Public Company Limited 

             535.7

08/01/2016

Hope Construction Materials Limited

Breedon Group plc 

             544.8

07/27/2016

Breedon Aggregates Limited, 14 Ready-Mixed Concrete Plants

Tarmac Trading Limited; The Concrete Company Limited

Undisclosed

07/27/2016

DC Co., Ltd.

Taiheiyo Cement Corp. (TSE:5233)

             135.0

07/27/2016

Granite City Tool Co., Inc.

Harbour Group Industries, Inc. GranQuartz 

Undisclosed

7/11/2016 

LafargeHolcim India

Nirma Ltd.

          1,400.0

07/01/2016

Italcementi SpA

HeidelbergCement AG (acquired 45% stake)                       

          1,820.3

Source: S&P Capital IQ & FactSet

 

Private Equity Transaction Activity & Valuations

GF Data Resources, a provider of detailed information on business transactions ranging in size from $10 million to $250 million, provides quarterly data from over 200 private equity firm contributors on the number of completed transactions.  Figure 4 provides the number of completed transactions from GF Data contributors, the average EBITDA multiple and the average amount of debt utilized in the transaction computed as a multiple of EBITDA.  The data, although not industry specific, shows valuations consistent with prior periods but the number of transactions were significantly down from the prior quarter and the same period in 2015. 

 

 

Industry Spotlight

LafargeHolcim analyzed historical and projected cement supply and demand in its recent Capital Markets Day 2016 Market report delivered on November 18, 2016 (Figure 5). Demand for cement in the U.S. is expected to exceed supply by 3 million metric tons in 2018 with demand further outpacing supply by 13 million metric tons in 2020.

 

 

Company Spotlight

International and domestic aggregates providers experienced mixed results in revenue and margins in Q3 2016. 

 

LafargeHolcim recently reported Q3 2016 financial results. During the quarter, the North American region experienced a sales decline of 4.8 percent compared to the same period in 2015 but delivered a 4.5 percent improvement in Adjusted EBITDA margin achieved through successful implementation of new pricing strategies, synergies and cost reduction measures. Adjusted EBITDA on a like-for-like basis for Q3 was up 9.2 percent despite softened materials demand.[2]

 

LafargeHolcim Vietnam, August 2016 - LafargeHolcim announced the signing of an agreement with Siam City Cement Public Company Limited (“SCCC”) to divest its entire 65.0 percent stake in the LafargeHolcim Vietnam joint venture for an enterprise value of CHF 867 million.  LafargeHolcim Vietnam operates one integrated plant and four grinding plants with an annual cement grinding capacity of 6.3 million tonnes. The company is also a leading ready-mix concrete producer operating seven plants in Southern Vietnam.[1]

 

LafargeHolcim India, July 2016 - LafargeHolcim announced a letter agreement with Nirma Limited for the divestment of its interest in Lafarge India for an enterprise value of approximately USD 1.4 billion. Lafarge India operates three cement plants and two grinding stations with a total capacity of around 11 million tonnes per annum. The company also markets aggregates and is one of India’s leading ready-mix concrete manufacturers.[1]

 

The MDU Resources Group construction materials business reported record third quarter earnings of $69.5 million, up from $68.8 million for the same period in 2015. This business saw higher construction margins with increased construction activity in the Pacific and northwestern U.S. and lower selling, general and administrative expense. Backlog in the construction materials business is $580 million, which is up 9.0 percent from last year. “We have streamlined our company and our two primary business lines, construction materials and services and regulated energy delivery, are providing solid results,” said David L. Goodin, president and CEO of MDU Resources. “Our construction businesses continue to experience strong momentum as the country turns more attention to needed infrastructure improvements.”[1]

 

Transaction Spotlight

Argos USA Corp., a subsidiary of Cementos Argos, entered into a definitive agreement to acquire a plant and eight related terminals from Lehigh Hanson, Inc. and Essroc Corp., subsidiaries of HeidelbergCement, for $660 million in cash on August 17, 2016. The sale was required by the Federal Trade Commission (FTC) to address competition concerns arising from HeidelbergCement’s Italcementi acquisition. The transaction is expected to close in the fourth quarter of 2016 and received FTC approval in November. Transaction financing has been arranged by J.P. Morgan through a bridge loan.[3] 

 

Construction Materials

Construction material prices increased 0.3 percent in September, but are nearly flat year-over-year, according to an Associated Builders and Contractors analysis of Bureau of Labor Statistics data. As has been the story in recent months, the monthly price gain was driven mainly by natural gas and crude petroleum prices, which expanded 10.2 percent and 9.1 percent respectively for the month. It is important to note that nonresidential input construction prices are now higher on a year-over-year basis for the first time since November 2014.[4]

 

Aggregates Materials

Industry results in Q3 2016 showed quarterly declines in volume compared to the same period in 2015 for cement, crushed stone and sand & gravel.  Asphalt prices have declined in the first half of 2016 but stabilized and rose slightly in Q3. 

Cement

  • Portland cement consumption (23.2 million metric tons) decreased by 5.0 percent in Q3 2016 compared to Q3 2015
  • Year-to-date consumption compared to the prior year is up 1.9 percent.

Ready-Mix Concrete (RMC)

  • RMC prices rose 2.1 percent in Q3 2016 as measured by the average RMC net selling prices of U.S. Concrete, Vulcan Materials, Martin Marietta and Eagle Materials
  • Quarterly RMC volume data is not reported. 

Crushed Stone

  • A 6.0 percent increase YTD compared to the same period in 2015
  • Production for consumption decreased in 24 of the 46 States for which estimates were made

Sand & Gravel

  • The estimated U.S. output of construction sand and gravel produced and shipped for consumption in Q3 2016 was 290 million metric tons
  • This represents a decrease of 0.7 percent compared to the same period in 2015 but an increase of 8.6 percent compared to the prior quarter
  • Production for consumption decreased in 24 of the 45 States for which estimates were made

 Asphalt

  • Asphalt prices rose 1.3 percent during Q3 as measured by the average net asphalt selling prices of Vulcan Materials and Martin Marietta Materials
  • Asphalt prices are down 4.2 percent compared to Q3 2015 but rebounded 1.3 percent in Q3 2016

Sources:

[1]  MarketWatch: “Stocks of companies that might build Trump’s border wall scale record heights” Nov 9, 2016, Tomi Kilgore

[2] LafargeHolcim Third Quarter 2016 Results

[3] MDU Resources Group, Inc., “Record Earnings at Construction Materials Business Leads MDU Resources' Third Quarter”

[4] S&P Capital IQ & HeidelbergCement Press Release

[5] U.S. Geological Survey

Headwaters MB is an independent, middle-market investment banking firm providing strategic merger and acquisition, corporate finance, and merchant banking services through proprietary sources of capital. Named “Investment Bank of the Year” by The M&A Atlas Awards in 2015, Headwaters MB is headquartered in Denver, with six regional offices across the United States and partnerships with 18 firms covering 30 countries. For more information, www.headwatersmb.com. To discuss any information contained in this report, contact the Headwaters MB team: Darin Good, managing director, dgood@headwatersmb.com, 303-549-5674; Brian Krehbiel, vice president, bkrehbiel@headwatersmb.com, 303-531-5008.