FRANKFURT (Reuters) - Germany’s HeidelbergCement (HEIG.DE) has re-emerged as a global M&A player with the 6.7 billion-euro ($7.4 billion) takeover of Italcementi ITAI.MI, after spending the best part of a decade repairing the damage from its last major acquisition.
The company has been painstakingly rebuilding its finances since the global financial crisis pushed it to the brink of bankruptcy after its debt-fueled, 7.85 billion pound ($12 billion) acquisition of Britain’s Hanson in 2007.
It sat on the sidelines while Lafarge and Holcim plotted their $44 billion mega-merger to create the world’s biggest cement maker, and even ignored the 5 billion euros’ worth of assets those firms had to sell to get the deal done.
As recently as last month, HeidelbergCement Chief Executive Bernd Scheifele said his priority was returning cash to shareholders and promised to be “disciplined” about acquisitions.
But on Tuesday night, the firm announced an agreement to buy 45 percent of Italcementi for 1.67 billion euros and bid for the rest, creating the world’s biggest player in aggregates, the No.2 in cement and the third-biggest in ready-mix concrete.
“Timing is important,” Scheifele said on Wednesday. “We bought Hanson at the top of the (industry) cycle. This time we believe we’re buying at the bottom of the cycle.”
“We did a worst case-scenario analysis, we believe the downside is very small, we have done the financing very generously and very long term, and we will go at the issue of deleveraging very aggressively,” he said.
Analysts had mixed views about the deal - they broadly agreed that Italcementi was a good fit for HeidelbergCement, but some had concerns about the price while others said management’s recent comments had left investors ill-prepared for such a move.
Shares in HeidelbergCement closed down 6.3 percent on Wednesday, more than the roughly 4 percent dilution that will be caused by the issuing of new shares to help fund the deal.
“Given the financial troubles caused by the Hanson acquisition in 2007, the subsequent emphasis on deleveraging and the primary focus that (we thought) management had placed on smaller acquisitions, we are somewhat surprised to see the group embark on a close to 7 billion-euro EV asset purchase,” wrote Credit Suisse analysts, who rate the stock “underperform”.
Jefferies analyst Mike Betts, who rates the stock “buy”, said the deal was “unlikely to be a repeat of Hanson”, calling it “a good fit at a fair price”.
This time, Scheifele says, things will be different.
HeidelbergCement is paying 7.9 times expected core earnings for Italcementi, a far cry from the 12.2 times it paid for Hanson - but still more than its own multiple of 6.7, and a 61 percent premium to Italcementi’s closing price on Tuesday.
Scheifele believes southern European markets where Italcementi is well-positioned like Italy, Spain and France are poised for recovery, while the acquisition will give it access to emerging markets including Egypt, Morocco and Thailand.
He said he expected a recovery in housing markets in Europe, adding that Egypt was stabilizing under President Abdel Fattah al-Sisi and that the widening of the Suez Canal would bring new opportunities.
“We at HeidelbergCement can make much more of Italcementi’s assets ... Heidelberg and Italcementi are geographically very complementary; it’s a very good fit,” he said, using almost identical language to that which he used about the Hanson deal.
HeidelbergCement expects 175 million euros in annual synergies from the deal, and 1 billion euros in proceeds from antitrust-driven divestments including a cement plant in Belgium and two in the United States.
Scheifele denied he was jumping on the bandwagon of the LafargeHolcim LHN.VX merger but acknowledged such megadeals had “ripple effects”.
Editing by Thomas Atkins and Pravin Char