Cement M &A activity highlights record profits, local monopolies

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A series of aggressively expanding cement manufacturers are posting record profits and a run-up in stock prices, but their successes also show regional contractors are often dependent on only one or two suppliers for aggregate, cement, concrete and other construction materials—the Federal Trade Commission says the situation can lead to anti-competitive behavior and price volatility.

A recent settlement between FTC and Europe-based cement mega firms Holcim Ltd and Lafarge SA allowed the companies to proceed with a merger expected to create the biggest cement manufacturer in the world. But, FTC demanded a divestiture of the companies’ North American assets to protect regional markets from cement monopolies. FTC said cement markets in 12 states would be jeopardized by the merger, including Minnesota.

Utilization of U.S concrete capacity is yet to break 80 percent, so cement consumers—like contractors—should not be suffering from supply constraints, says Ed Sullivan, chief economist, Portland Cement Association. The trouble is that cement doesn’t trade nationally, which means single firms can rise to dominate local markets by controlling production and price.

“In Ontario, there are a lot of concrete mixers, but they can only get powder and aggregate from one distribution center,” says Tony Mollica, Operative Plasterers, Cement Masons and Restorative Steeplejacks International Association Local 598, Woodbridge, Ontario. “Lafarge has had the monopoly on that here.”

Lafarge seeks a buyer for its Mississauga, Ontario cement plant, FTC said.

Adjacent to the Holcim-Lafarge deal, a flurry of mergers and acquisitions activity has seen top firms stepping-up to dominate regional demand. Summit Materials bought a Davenport, Iowa cement plant and a series of mix terminals from LaFarge for $450 million as a result of the FTC merger settlement. The Blackstone Group-controlled Summit pushed through an initial public offering in March at a buy-in price of $18 per share. It’s now trading at $25.53.

Other firms that made acquisitions in the last 12-18 months are seeing similar gains. Martin Marietta bought Texas Industries for $3 billion in 2014 and is looking at an earnings per share growth rate of 45 %, analysts said, adding that the more manufacturing assets a company controls, the greater its pricing power. Further, Martin posted an 18 percent price increase for its West Group, largely composed of former Texas Industries facilities.

“If you gobble up a competitor that offered a discount to your product, then yes– that’s going to increase your pricing power,” says Jim Barrett, cement sector analyst, CL King Associates. “FTC’s [finding] that the merger of only two companies would affect 12 states, that would suggest that there are significant supply constraints.”

Vulcan materials, which bought five aggregate facilities in the southwest and on the East Coast last year for $320 million, reported that total profits increased 128% to $78 million during the first quarter. Eagle Materials also acted on the Holcim-Lafarge divestiture settlement, buying a Chicago granulated slag plant in March for $30 million. Like its colleagues, the firm is riding a record year—revenues up 19 percent to $1.1 billion and earnings per share up 49 percent to $3.71.

Barret says analysts’ consensus shows concrete prices rising 9% over the next 12 months.

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