Strategies & Market Trends : Cemex
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From: Sam Citron10/28/2006 12:00:09 PM
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Cemex Enters New Terrain With Bid for Rinker [WSJ]
October 28, 2006; Page A3

Cemex SAB's unsolicited $11.7 billion offer for Australia's Rinker Group Ltd. -- a major seller of construction materials in the U.S. -- is uncharted territory, even considering the Mexican cement maker's growing penchant for big deals.

The all-cash offer is twice as big as Cemex's prior biggest deal, last year's $5.8 billion purchase of Britain's RMC -- a move that made Cemex the world's biggest seller of ready-mix concrete. It's also Cemex's first foray into the world of unsolicited takeovers, usually far more complex and costly than the so-called friendly deals it has negotiated in the past.

Rinker executives said in a U.S. Securities and Exchange Commission filing on Friday that they were unaware the Cemex offer was on its way, meaning it's unclear whether management will respond favorably, or will begin what could be a drawn-out process of seeking competing bids.

Unsolicited takeover offers are always a tricky proposition because they open the door for another suitor to step in, prompting a bidding war that ups the price. They can also take months or even years to complete, draining time, attention and money from top management.

Potential competitors include U.S. aggregate companies such as Martin Marietta Materials Inc. and Vulcan Materials Co., as well as Cemex's big cement rivals, Holcim and Lafarge -- or any of the private-equity firms, analysts said. Rinker traded above the offer price on Friday, suggesting investors think Cemex will be forced to raise its bid. Cemex put the total value at $12.8 billion, including Rinker's debt.

Cemex does have one advantage: Australia takeover law is very friendly to unsolicited offers, giving little leeway to boards and managements that act against the wishes of shareholders.

In an interview, Cemex Chief Executive Lorenzo Zambrano said the company had hoped to consult first with Rinker officials, but was forced to rush its unsolicited bid after "rumors in the market" began circulating, potentially inflating Rinker's share price. The Wall Street Journal first reported that Cemex had Rinker in its sights on Friday.

Mr. Zambrano said Cemex executives are already on their way to Sydney to explain their bid to board members and regulators. The bid prices Rinker at US$13 a local Australian share, or about a 26% premium over the average trading price during the past three months, Cemex said. "Certainly, we would hope for a friendly deal," Mr. Zambrano said. "This is not a hostile offer. It's unsolicited for tactical reasons."

An increasingly aggressive appetite for acquisitions has helped Cemex grow rapidly from a domestic cement maker in Monterrey to become one of the world's biggest players in construction materials. Under the direction of Mr. Zambrano, 62 years old, Cemex started its expansion as a defensive strategy in the early 1990s to bulk up as Mexico dismantled its trade tariffs and sought deeper integration with the global economy.

Cemex soon went on the offensive, completing more than a dozen deals, and making it the world's third-biggest cement company, after Holcim and Lafarge.

The purchase of Rinker, if it is completed, would make Cemex the world's biggest producer of cement aggregates and expand Cemex operations in its biggest market, the U.S., where it's already the single biggest producer of cement.

While Rinker is based in Australia, about 85% of its business is in U.S. states such as Florida and Arizona. Rinker's dependence on the U.S. residential-housing market has some on Wall Street worried. The concern is that Cemex is increasing its bet on a market that is entering a downturn, before it is fully clear how deep or prolonged the downturn will be. Mr. Zambrano defended the decision, saying he has confidence in U.S. long-term prospects.

The deal, which is to be financed through borrowing, will more than double Cemex's debt load to around $21 billion, prompting Fitch Ratings and Standard & Poor's Ratings Group to announce they may downgrade Cemex's credit rating.
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