Acquisition of rival Apac strengthens Irish group's position in America, writes Barry O'Halloran
News this week that building materials group CRH is set to buy a US rival for more than €1 billion swings the balance of its business back across the Atlantic.
CRH is buying Atlanta, Georgia-based Ashland Paving and Construction (Apac) from its parent, Ashland Corporation, in a deal that the Irish business says is its biggest ever.
Analysts estimate the move will add an initial 2 per cent to earnings, close to four cent a share, or around €40 million before interest, tax and write-offs.
The move means CRH, whose €14.5 billion sales and €1.4 billion earnings were split roughly 50-50 between Europe and the US in 2005, will be generating the bulk of its revenues and profits from across the pond. As things stand, the divide is likely to be 55-45.
This is not the first time that this has happened. Earlier in the decade, following a series of purchases in the US, and when the dollar was stronger than it is now, the group's earnings split almost 60-40 in favour of the US.
The difference this time is that the shift is a consequence of the fact that Apac is its biggest ever purchase. Also, CRH's Liam O'Mahony told analysts this week that it will pave the way for more "bolt on" acquisitions, that is small companies that easily fit in with the group's business, in new territories in the US.
And the fact that Apac opens up new territory to the Irish group is one of its key features. It will bring CRH's Americas materials division into 11 states, where previously it did not have a presence. Once the deal is completed, it will have a base in 42 out of the 50, compared to 31 previously.
The division's interests will stretch from the Great Lakes to the Gulf and from the Atlantic to the Pacific. Before Apac, there was a yawning gap across the midwest and west, and this will effectively be closed.
If you ally that presence to the other element of its US business, products and distribution, CRH will have operations in all US states, Canada, Argentina and Chile.
The new acquisition will position CRH to take transcontinental advantage of a federal infrastructure building programme that runs from this year to 2009 and has a budget of $286 billion (€224 billion). The bulk of this will be spent on highway construction, something which Apac specialises in.
CRH is already the biggest producer of asphalt, used to surface these roads, in the US. Last year, it manufactured 37.3 million tonnes of it. Apac produces 31 million tonnes in its own right. The deal almost doubles the Irish group's capacity at a time when demand for asphalt is going to grow.
As it is, analysts say that around 38 per cent of the €7 billion in annual sales that CRH has in the US comes from road building, either directly or as a sub-contractor. John Mattimoe of Merrion Capital estimates that this will increase to 42 per cent.
In terms of the Americas materials division alone, he estimates that the contribution to sales from this business will be 65 per cent. That had sales last year of €3.16 billion. At current rates, Apac will add more than €2 billion a year to that figure.
One concern dominating the US building industry at the moment is that the housing market is cooling. From Apac's point of view, this is irrelevant as it has little real exposure to this market. The group that it is joining does trade in the residential sector. However, Mattimoe points out that the Apac deal means that housing will slip from 32 per cent to 29 per cent of CRH's US business, and will thus lessen the overall impact of the slowdown. Products and distribution is likely to feel the effects more keenly, as 50 per cent of its 2005 sales came from the residential sector.
John Sheehan of NCB believes that in any case, CRH is well positioned to deal with the housing market slowdown, simply because the group has a good spread of businesses across the US and across the three key construction sectors.
The third of these three is non-residential building, or commercial and industrial. This is continuing to deliver growth, and is showing no real signs of slowing.
One concern is that in its biggest business, asphalt, Apac's margins have slipped from 9 per cent to 7.6 per cent over the past four years or so. At the same time, margins at CRH's American materials division stand at around 15.6 per cent.
High oil prices are to blame for this. Asphalt is made using bitumin, which is in turn a by-product of oil refining. CRH has been better at managing these costs and passing them on to customers than Apac, and it seems likely that it will graft its own systems for dealing with the problem onto its acquisitions business.
O'Mahony said during the week that he expects initial savings in the order of €15 million a year to flow from the various efficiencies that the combined groups can achieve. Presumably, those efficiencies are going to include increased buying power, which in turn gives greater leverage with suppliers.
As a consequence of all this, Irish analysts believe that CRH is underpriced. Both Sheehan and Mattimoe yesterday produced research notes arguing as much and recommending that investors buy. Its shares are priced at between 10 and 11 times its earnings, but its peers are valued at around 12 times earnings.
One place where it is said to be be undervalued is the one that is primed to deliver the bulk of its sales and earnings, the US. Along with its Dublin and London listings, CRH American Depositary Receipts (ADR) are traded on the New York Stock Exchange. But it appears that Wall Street is not that enthusiastic.
By close of business here yesterday, more than five million CRH shares changed hands between Dublin and London. Just 5,800 ADRs traded in New York, where the units were valued at a little over $33.20, compared with €25.75 in Dublin.
Sheehan argues that this is not really an issue. "If you look at their share register, you'll see that US investors are well represented there," he says. "It's true that most of the activity is in Dublin and London, but that has not made any difference."
Nonetheless, this has not stopped people speculating that CRH will shift its HQ to the US in a bid to get that country's parochial investors to recognise the scale it has there and to start buying its shares.
Sheehan and Mattimoe point out that this is unlikely. They say there could be huge tax implications for the group , as well as the expense and logistics involved in moving the headquarters infrastructure that it has built up here across the Atlantic.
The theory also ignores that close to half the business is based in Europe, which is, supposedly, on the brink of recovery. On top of that, Mattimoe says that such a move might not pay off. "You could go to all that trouble and expense, and then find it's not delivering the desired results," he argues.
