An $11 bln concrete deal is about unset options
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to say "industry" instead of "business" in sixth paragraph.
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.
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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.
US commercial construction spending surges https://reut.rs/414Pu0K
Editing by Jonathan Guilford and Pranav Kiran
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