Martin Marietta Materials Inc (MLM.N) will take its $5.7 billion hostile bid for Vulcan Materials Co (VMC.N) to a Delaware court on Tuesday in its drive to seize its larger rival and create the world's largest producer of gravel, sand and other construction materials.
Vulcan wants an injunction to stop what it considers a low-ball bid. It has accused Martin Marietta of "unethical, unlawful and increasingly erratic behavior," and the four-day trial will turn on whether its suitor breached a contract to keep deal talks private.
Martin Marietta, based in Raleigh, North Carolina, launched an unsolicited bid for Birmingham, Alabama-based Vulcan in December. It argued that the all-stock takeover would provide up to $250 million in cost savings while delivering a more competitive range of products.
Martin Marietta shares have jumped about 20 percent since the bid, raising the deal value from $4.7 billion when it was announced. Vulcan's shares are up about 35 percent.
The trial before judge Leo Strine is scheduled to conclude on Friday.
Vulcan has said the offer "seriously undervalues" its stock and has fought back with planned asset sales and cost-cutting steps. Martin Marietta has belittled those plans and pointed to what it said was Vulcan's poor history of responding to challenges.
"Vulcan wants to block the deal any way they can," said Elizabeth Collins, a stock analyst at Morningstar who follows the sector. She said Vulcan shareholders appear to expect Martin Marietta to increase its offer, based on the stock price reaction.
The two companies have discussed a combination for years, but talks became serious in April 2010, shortly after Howard Nye became Martin Marietta's chief executive, according to court documents.
Talks eventually broke down in June 2011 after Vulcan's chief executive, Don James, concluded the price was too low, potential cost savings were disappointing and the regulatory hurdles were too high, according to court records.
After Martin Marietta went hostile, Vulcan sought to fend off the move in court by arguing its rival breached confidentiality, or nondisclosure, agreements.
During negotiations, the two had swapped market data, details about operations and legal analysis of how to structure a merger, but they signed contracts restricting the use of the information to "the Transaction."
Vulcan said on Monday that "our litigation seeks to hold Martin Marietta accountable for the fact that they signed and breached two binding contracts."
Martin Marietta declined to comment on Monday. The company has argued in court papers that it did not breach confidentiality agreements and those contracts do not prevent it from making an unsolicited public offer.
Vulcan risks losing the argument that "the Transaction" excluded a hostile bid because the type of deal is not explicitly defined, said Brian Quinn, a professor at Boston College Law School.
Collins, the Morningstar analyst, said even if Vulcan does not block the deal in court, it would take a long time to complete a hostile deal and Martin Marietta would still prefer to negotiate with Vulcan's board.
While the two slug it out in court, some shareholders are growing impatient.
One of Vulcan's largest investors, Southeastern Asset Management, warned the company's board in January that Southeastern will vote for the slate of directors proposed by Martin Marietta if they do negotiate.
Martin Marietta has proposed five candidates for Vulcan's 11-member board, which will be elected at an annual meeting in May.
Martin Marietta has a stock market value of about $4 billion. Vulcan's stock market value is just shy of $6 billion. Martin Marietta has proposed Vulcan's shareholders would own 58 percent of the combined company under the terms of its bid. It is offering one half of each of its shares for each share of Vulcan.
Shares of Martin Marietta were trading up 0.4 percent to $88.06 in afternoon trading on Monday, while shares of Vulcan were down 0.2 percent at $46.09.
The trial is being heard in Delaware as required by the nondisclosure agreement. A ruling is not expected immediately.
(Reporting By Tom Hals; Editing by Tim Dobbyn)