An $11 bln concrete deal is about unset options

Vulcan Materials Co

26/11/2024 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Robert Cyran
       NEW YORK, Nov 25 (Reuters Breakingviews) - Concrete,
once set, is unmalleable; until then, it can be shaped into
anything. Quikrete’s acquisition of rival construction material
company Summit Materials  SUM.N  for a bit over $11 billion,
including debt, similarly gives the buyer crucial optionality
for a while yet.
    Quikrete is one of the biggest producers of packaged
concrete and cement in North America. The private company is a
serial acquirer, though hasn’t quite struck a roaring bargain
here. Sure, the seller's stock fell when the deal was announced
on Monday after overheating amid M&A speculation. But Summit is
expected to have about $650 million of operating earnings next
year, according to analyst estimates collected by LSEG. Taxed,
that’s roughly a mediocre 5% return on the buyer’s investment.
    Squint, and you can see possible reasons for the attraction.
The price, at roughly 11 times estimated next-twelve-months’
EBITDA, is reasonable, especially considering there has been a
rush of subsidy-boosted U.S. commercial construction.
    Moreover, America’s underinvestment in infrastructure and
pent-up demand for new housing could lead to construction
spending growing roughly 25% by 2028, according to Cascadia
Capital. Already, investment in just about every category
tracked by ConstructConnect - from power to health care - is
running above the trend of the last couple decades. This might
be a well-timed deal.
    Combining Summit’s ready-made concrete offerings with
Quikrete’s should also yield cost savings that meaningfully
boost returns. More speculatively, there could be gains from
vertical integration. About a third of Summit’s revenue last
year came from producing aggregates like granite and limestone,
used directly in construction, or indirectly in things like
ready-made concrete. Sending more of Quikrete’s sourcing toward
Summit’s quarries might lead to savings and additional captured
revenue.
    Of course, construction is heavily dependent on interest
rates and available labor. The incoming administration of
President-elect Donald Trump promises to enact large tariffs on
imports and deport undocumented immigrants, potentially sparking
higher inflation and therefore higher rates, as well as
increasing employment costs. Here, the deal might offer a
partial escape hatch. Peers selling aggregates tend to attract
far higher multiples than Summit ever did. Vulcan Materials
 VMC.N , for instance, trades at roughly 17 times its forecast
EBITDA. If sourcing in-house doesn’t end up moving the needle,
this business is an obvious candidate to sell should the
cyclical construction industry turn south. Quikrete doesn’t have
to set its plans in stone quite yet.
    
    Follow @rob_cyran on X
         
    CONTEXT NEWS
    Summit Materials said on Nov. 25 it had agreed to be
acquired by Quikrete in a deal valued at $11.5 billion,
including debt. The purchase price, at $52.50 a share in cash,
represents a 29% premium to Summit’s closing price before
Reuters reported news of talks between the companies in October.
    Quikrete is a privately-held company based in Georgia, and
one of the largest manufacturers of packaged concrete and cement
in North America.
    Summit makes construction materials including cement,
ready-mix concrete and aggregates.

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US commercial construction spending surges    https://reut.rs/414Pu0K
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 (Editing by Jonathan Guilford and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  CYRAN/ 
robert.cyran@thomsonreuters.com))