Rising to the Summit

Summit Materials Inc remains a talking point, having been the subject of two mystery bids just weeks after agreeing to merge its operations with Argos North America Corp. The two rejected bids are believed to have come from Heidelberg Materials USA, according to Bloomberg.

Proxy disclosures showed that an unnamed bidder made two offerings of US$37.5 per share and US$38 per share in recent weeks, which the Summit Materials' Board turned down. These bids are now believed to have come from Heidelberg Materials that unsuccessfully tried to rival the Argos agreement.

Clearing the air, Summit Materials held an analyst-led fireside chat about the US$3.2bn Argos agreement on 10 October 2023 with Anne Noonan, Summit Materials’ CEO, and Scott Anderson, Summit Materials’ CFO. Ms Noonan revealed that Summit Materials is “right on track to complete this [Argos] deal in the first half of 2024.”

Summit Materials' goal is clear. “Our board is absolutely laser focused on driving superior value creation for our shareholders... So consistent with that, when we received this unsolicited proposal, we carefully reviewed it with assistance from our legal and financial advisors, and the board unanimously concluded that this would not reasonably be likely to lead to a superior proposal versus the Argos transaction,” stated Ms Noonan.

Argos will own a 31 per cent share in the newly-combined company with three representatives on the board and eight Summit-appointed representatives. The new company will have four integrated plants, two grinding plants with 9.6Mta of cement production, 10 inland terminals and 140 ready-mix plants. 

Improving US market
The decision to grow in cement now is an indication of improving fundamentals in the US cement market. “We actually believe it’s exactly the right time to get bigger in cement, and the reason for that is supply is low, demand is high. We have a unique opportunity to drive profitable growth for cement. And we’re not unique in the view that cement has very strong fundamentals in the near- and long-term trade,” commented Ms Noonan.

Confidence in the cement market has risen with the knowledge that the Chips and Science Act and the Inflation Reduction Act (IRA) will invest US$600bn into the supply chain that will shore up domestic cement manufacturing. Even the non-residential and commercial segments are expected to boost cement demand. Summit estimates a 20Mt shortfall in domestic production versus US demand by 2027.

The value for companies owning a bigger US cement production base is clear. Of the US$80bn that has been invested in IRA so far, Argos’ top five states have received 35 per cent of that. “So, we are absolutely convinced in - that cement demand is accelerating and that it will be sustained,” said Ms Noonan.

Argos is the best fit
The Argos deal is right for Summit Materials because of a number of synergy factors. The core areas where Summit Materials is strong offer synergy potential. Operational efficiency is one area where Summit intends to cut costs. The Hannibal plant, for example, is now operating at 85 per cent and is best-in-class, according to Summit Materials. The company also leads the way in alternative fuel replacement at three times the level of anyone else in the industry. Argos operates at about 12 per cent fuel replacement and Summit believes it can raise that to 40+ per cent, reducing cost and improving margin, while lowering carbon emissions. Finally, in Portland limestone cement (PLC) manufacture, Summit Materials was the first to convert its plants to PLC production and it can bring the same technology to the Argos plants.

Operational synergies of US$100m are targeted by Summit Materials and 50 per cent of these are expected to be delivered within the first 24 months. The Harleyville and Martinsburg plants are the biggest opportunities for de-bottlenecking and improving reliability. Martinsburg’s kiln is down at 59.8 per cent efficiency and the plant needs a new baghouse. “We’ve already identified US$14m for critical spares that need to be on hand,” added Anne Noonan.

For Harleyville, Summit is looking to build a roof over the stockpile that feeds the plant to reduce water content in the raw materials. Summit Materials is also lining up a 2024 capex spend, particularly aimed at the FuelFlex project at the Davenport cement plant, to increase alternative fuel usage above 50 per cent. 

Build versus buy equation
What excites Summit Materials about the Argos deal is not only the creation of better value for its shareholders but also the fact that it allows the company to do what it has always done best: expand through bolt-on growth acquisitions in aggregates, ready-mix and cement. For cement, the build versus buy equation is simple. To build a new line at the Hannibal plant would cost US$800-1000/t, according to Anne Noonan, while this transaction will work out at US$300/t.