It was reported last night that Martin Marietta is close to announcing that the company is to acquire Texas Industries in what is expected to be an all stock deal. The deal, subject to its confirmation, looks to be interesting in that it will provide the second largest aggregates producer in the US with cement market exposure in Texas and California, but at an extremely expensive price. <p>
Martin Marietta ended Q3 2013 with approximately $1.06 billion in debt (FY 2013 EBITDA forecast: $392 million) putting the company on a net debt/EBITDA multiple of 2.7x while Texas Industries which has been chronically loss making in recent years ended its most recent quarter (Q2 2014) with net debt of $577 million (FY 2014 EBITDA forecast: $125 million) putting the company on a net debt/EBITDA multiple of 4.6x).<p>
The balance sheets of both companies necessitate that any deal will have a significant equity component to it but we struggle to see how shareholder value can be achieved from the deal given that Martin Marietta’s market capitalisation at $4.7 billion is roughly 2.35x the size of Texas Industries current market capitalisation of $2.04 billion, potentially making the deal quite dilutive to existing Martin Marietta shareholders. It is also an expensive deal given that Texas Industries is not forecast to make a net profit in the current year and is only expected to generate a net income of $41 million in FY 2015, placing the company onf 48x earnings for FY 2015 and 22x earnings in FY 2016. We also think that there will be limited synergies that can be achieved given that Martin Marietta currently has no exposure to cement, so synergies are likely to focus on corporate activities.
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