Martin Marietta Bets on Efficiencies in Hostile Takeover Bid for Vulcan

Martin Marietta Materials issued a hostile takeover offer for Vulcan Materials, valuing its larger rival at $4.8 billion. Martin Marietta is offering half a share of its stock for each Vulcan share, and proposing leadership of the new company be drawn from the executive boards of both.

The two largest aggregate producers in the U.S. had been discussing a merger off and on since 2002, with negotiations intensifying in 2010. But talks broke down recently.

"Martin Marietta's board of directors is, and I personally am, disappointed that despite these substantial benefits, Vulcan has been unwilling to move ahead toward a definitive agreement," Martin Marietta Chairman and CEO Ward Nye wrote in an open letter to Vulcan Chairman and CEO Donald James.

The "substantial benefits" of combining the companies begin with a single mineral reserve of 28 billion tons in a company that would serve 35 states with more than 630 facilities, producing nearly 2.5 times the aggregates of the nearest competitor (CRH's Oldcastle Materials Group).

In addition to creating a company sized for growth in what is expected to be a very tough U.S. market for the foreseeable future (and at a much more benevolent debt-to-earnings ratio than Vulcan's current position), Martin Marietta projects the combined company would save $50 to $60 million over the next three years based on purchasing power alone.

Two companies the size of Martin Marietta and Vulcan inevitably serve in many of the same states, but Nye characterizes the two as having remarkably few redundant facilities. And Vulcan markets in key growth states of California, Arizona and Illinois, as well as Kentucky, Pennsylvania and Delaware, where Martin Marietta is not.

Eliminating duplicate operating functions would contribute another $50 to $60 million to Martin Marietta's estimated synergy savings over the coming three years.

The bulk of synergies from the tie-up – propelling Martin Marietta's estimate of total savings to an estimated $200 to $250 million – would come from eliminating redundant sales and general administration costs (SG&A). Valuing the savings produced by synergies is one of shoals on which negotiations between the companies foundered.

Overhead is an area where Martin Marietta believes it can deliver strength in the contest of a new Vulcan Marietta. Between 2007 and 2011, SG&A for Martin Marietta has averaged 8.4% of sales. Vulcan averaged 11.2%.

Should the takeover attempt succeed, the big question will be, "Does the operating discipline Martin Marietta is so proud of work in the context of a company more than twice the size of the one in which it was proven?"

But it's no simple trick to incite the competitor's shareholders to help it wrestle the behemoth Vulcan into submission and impose a bunch of systems and procedures on the larger organization. That much is clear from both the terms and the rhetoric Martin Marietta is proposing.

They propose combined leadership, with Vulcan Chairman and CEO Don James as chairman of the board, Ward Nye as CEO and President and the remaining executive board selected from both companies. Marietta wants approval by the Vulcan board and shareholders of both companies.

Twice in a Monday-morning conference call announcing the takeover bid, Nye asserted, "I want to emphasize and reemphasize that it is our preference to enter into mutually agreed upon transaction with Vulcan. We are ready and willing to meet with them and their advisors to accomplish this objective."

Given the history of negotiation between the companies, it seems the impetus to return Vulcan to the negotiating table will be shareholder pressure. It remains to be seen if the tax-free, stock-for-stock exchange in which every Vulcan share would be exchanged for half a Martin Marietta share will be enough to bring a Vulcan counter offer. As it stands, the transaction represents a 15% premium over Vulcan's 10-day average stock price up to December 9; an 18% premium over Vulcan's 30-day average.

Vulcan shareholders would own 58% of the combined company, and Nye is quick to assure them that Martin Marietta's management is prepared to continue paying $1.60-per-share dividends. That's 80 cents on every Vulcan share in the proposed company, about 20 times what Vulcan is paying per share today.

"The combined Martin Marietta and Vulcan Materials would be the unquestioned, U.S.-based global aggregates leader," Nye said, summing up his pitch for the proposal. Shipping 278 billion tons in 2010 would make it No. 1 in the world, with HeidelbergCement snapping close by its heels at just 5% less.

Perhaps more importantly, it would be the clear leader of the American market, with about 15% market share, and "a strong presence in the fastest growing regions in the U.S."

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