CRH increases investment war chest
CRH’s recent disposal announced this week is being viewed as positive for further development as it keeps in line with the company's efforts to streamline its portfolio and provides additional financial flexibility for acquisitions.
On Tuesday CRH announced it had reached an agreement to dispose of its clay and concrete businesses in the UK and its clay business in the US. The move had been expected for a while with CRH said to be dissatisfied with the structural returns in the brick business. Industry analysts have viewed the move as good for CRH, on the understanding that the exit multiple is >12x 2013 EV/EBITDA. Even though results this year are likely to be very good (strong demand, excellent pricing especially in UK), Morgan Stanley note that "CRH is further re-aligning the business portfolio to maximise future returns and are getting out at what is likely to be peak margins in the UK brick business."
Boost to investment war chest
The sale is part of a programme of disposals as CRH boss, Albert Manifold, aims to focus the business on more core assets and build up a war chest for major acquisitions. With the detailed analysis of its portfolio now complete, the company has said its EUR1.5bn-2bn mulit-year divestment programme "is well underway." During its third-quarter trading statement, the company said it is hopeful of generating around EUR400m from its non-core asset divestment programme, which further boosts its investment firepower.
CRH’s focus is widely expected to shift back to key M&A activity, now that visibility is improving and the balance sheet is robust. During a management dinner earlier this month, CFO Maeve Carton reiterated that the company could spend EUR1.5bn over the next 18 months and still maintain its six times EBITDA interest cover, a key metric in CRH maintaining its investment grade rating. This does not include the expected EUR1.5bn-EUR2bn in proceeds from disposals. However, management also said it would not rule out a short-term downgrade to the group’s rating if an attractive acquisition opportunity were to present itself. By the end of September 2014, CRH’s overall acquisition and investment spend, for 2014, stood at EUR170m.
US: focus for spending
The US is expected to be a continued focus for spending. Trends in the US have been towards the top of management's initial expectations this year and more of the same is anticipated in 2015, even assuming no new highways bill, the Irish Examiner reported, quoting Davy Stockbroker's Barry Dixon. Management sees a strong cycle at least for the next 3-5 years and expects heavyside businesses like asphalt, aggregates and concrete to continue to require more capital. The US aggregates/asphalt/concrete market remains highly fragmented and although CRH is the largest player within the asphalt market, its market share remains low.
Lafarge-Holcim asset contender
Speculation is also rife that CRH is among three groups to submit binding bids for Lafarge and Holcim assets by mid-January. The other frontrunners include Blackstone, Cinven and Canadian pension fund CPP; a team consisting of CVC and sovereign wealth funds, the Abu Dhabi Investment Authority (ADIA) and Singapore's GIC.
CRH has previously said it believes the Lafarge-Holcim assets for sale include high quality businesses in areas like Canada, UK, Philippines, Romania and eastern Europe. While the company is most likely to be interested in the assets in eastern Europe, the German assets may be considered as part of its broader vertical integration strategy. Any assets would need to fit with the long-term strategy and be in areas where the group could either integrate them into the existing platform or increase integration.
Though CRH has kept quiet on its intentions regarding the Lafarge-Holcim divestments, it is believed that it is in a good position to make a bid. While management has not ruled out bidding for Lafarge-Holcim assets, Mr Manifold has highlighted that they do not constitute the bulk of the group’s acquisition opportunities.
