By Mark S. Kuhar
Martin Marietta Materials Inc. and Texas Industries Inc. announced that the boards of directors of both companies have unanimously approved a definitive merger agreement under which Martin Marietta will acquire all of the outstanding shares of Texas Industries common stock in a tax-free, stock-for-stock transaction.
The $2.7-billion deal will create a “market-leading supplier of aggregates and heavy building materials, with low-cost, vertically integrated aggregate and targeted cement operations,” the companies said in a combined statement. With greater geographic and product diversity and a leading distribution network, the combined company will have uniquely positioned assets across some of the nation's largest and fastest growing geographies, such as Texas and California.
As market conditions improve, the combined company will be well-positioned for long-term growth, with a network in excess of 400 quarries, mines, distribution yards and plants spanning 36 states, Canada, the Bahamas and the Caribbean Islands. With a significant increase in scale and the potential to achieve substantial synergies, the combined company will seek to grow faster and more efficiently than either Martin Marietta or Texas Industries could on a standalone basis.
Ward Nye, Martin Marietta's president and chief executive officer said, "By uniting Martin Marietta's and Texas Industries' complementary assets and leveraging an expanded geographic footprint, we will be even better-positioned to deliver value to our shareholders and customers. Texas Industries' aggregates operations are strategically located in high growth markets and fit well into our existing portfolio, and its cement operations will further diversify our product and customer mix. Through the significant investments Texas Industries has made in plant modernization and capacity expansion, it has achieved leading positions in some of the nation's highest growth markets while maintaining a low cost profile. As a result of this combination, we will be poised to capitalize on the strength of our combined aggregates platform as well as the significant upside potential in the infrastructure, residential and nonresidential construction segments. We are confident that combining our companies will accelerate our ability to increase sales and cash flow and improve margins. We are excited about the opportunities ahead and look forward to quickly realizing the benefits of this transaction."
Mel Brekhus, Texas Industries' president and chief executive officer, said, "Combining with Martin Marietta represents a unique opportunity to create a more competitive company with a solid, diversified portfolio of assets, enhanced credit profile and a strong balance sheet. We are confident that we have found the right partner. This combination will advance our growth objectives, deliver significant value to all of our stakeholders, and allow shareholders to participate in the combined company's potential growth and value creation. In addition, we are pleased that, through this combination, our shareholders will enjoy a strong dividend distribution. This transaction will create a larger, stronger entity with enhanced career and professional development opportunities for employees. I look forward to working closely with Ward and the proven management teams of both companies to complete the transaction quickly and to ensure a smooth transition."
Based on the closing stock price for Martin Marietta on Jan. 27, 2014, this consideration would be equivalent to $71.95 of Martin Marietta stock for each Texas Industries share. The exchange ratio represents a 13 percent premium to the average exchange ratio implied by the closing prices of Martin Marietta's and Texas Industries' shares during the last 90 days, and an over 15 percent premium to the exchange ratio implied by the respective closing stock prices on Dec. 12, 2013, the day prior to market speculation of a potential transaction.
The transaction reflects an enterprise value of approximately $2.7 billion, including the assumption of $0.7 billion of Texas Industries' debt. Upon closing of the transaction, Martin Marietta shareholders are expected to own approximately 69 percent, and Texas Industries shareholders are expected to own approximately 31 percent, of the combined company. The companies expect the transaction to be immediately accretive to Martin Marietta's earnings per share in 2014, assuming refinancing of Texas Industries' outstanding debt at or around the closing of the merger and excluding one-time costs.
Strategic and financial benefits of the transaction include:
- The Leader in the U.S. Aggregates Business: Martin Marietta will become the nation's largest producer of construction aggregates, supplying the crushed stone, sand and gravel used to build the roads, sidewalks and foundations on which Americans live. The addition of Texas Industries will add approximately 800 million tons of aggregates reserves, bringing the total to over 13.5 billion tons. Texas Industries shipped nearly 15 million tons of sand, gravel and crushed stone during fiscal year 2013. Texas Industries is a major supplier of aggregates in high-growth markets such as Texas, and has long-focused on the synergies available from operating in aggregates as well as cement and ready-mix.
- Increased Scale, Enhanced Growth Exposure and Vertical Integration in Select Markets: With vertically integrated operations across aggregates and targeted cement, the combined company is expected to be even more competitive. Texas Industries increases Martin Marietta's presence in the Southwest, with state-of-the-art cement production facilities concentrated primarily in Texas and California - two of the largest and fastest growing markets for construction materials in the United States. The increased scale and geographic diversity resulting from this transaction will provide a broader set of opportunities for organic and inorganic growth. In addition, select vertical integration will improve distribution and transportation costs, diversify end-markets and drive other value enhancing efficiencies. The combined company will also have an outstanding asset base that can deliver superior product offerings and service to customers.
- Significant Synergy Opportunities: The transaction is expected to generate approximately $70 million of annual pre-tax synergies by calendar year 2017, which would correspond to over $500 million total value creation for shareholders. Key drivers of these synergies include the consolidation of corporate overhead and duplicate functions, enhanced revenue opportunities and increased operational efficiencies through the adoption of best practices and capabilities from each company.
- Incremental Value Creation through Utilization of NOLs and Potential Real Estate Divestitures: Martin Marietta expects to be able to utilize Texas Industries' more than $400 million in existing NOLs over the next few years. In addition, the companies believe that there is an opportunity to realize incremental value from the expected divestiture of identified non-operating real estate assets.
- Financial Strength and Flexibility: The transaction is expected to be immediately accretive to Martin Marietta's earnings per share in 2014, assuming refinancing of Texas Industries' outstanding debt at or around the closing of the merger and excluding one-time costs. Martin Marietta expects that at the closing of the merger the combined company will maintain its strong existing credit ratings and have pro forma leverage of less than 3.0 times EBITDA for the 12 months ended Dec. 31, 2014. The combined company will continue to adhere to Martin Marietta's strict operational and financial discipline and, with improved access to capital, will be well-positioned to pursue a wide range of attractive growth opportunities to continue delivering value to shareholders.
- Strong Balance Sheet with Solid Cash Flows and Meaningful Dividend:The combined company will maintain a strong balance sheet with significant cash flow, giving it the ability to pay a meaningful quarterly cash dividend. The combined company intends to maintain the dividend at Martin Marietta's current rate of $1.60 per Martin Marietta share annually, equivalent to $1.12 per Texas Industries share annually, based on the proposed exchange ratio.
- Enhanced Value for Customers: The size and scale of the combined company will enable Martin Marietta to provide even more value for customers. With a collective workforce of approximately 7,000 highly-skilled employees and a shared commitment to providing exceptional construction materials and the best service and solutions, the combined company will be even better equipped to serve its customers and communities.
- Greater Employee Opportunity: This combination creates an even stronger base of talent by uniting two highly-skilled workforces with a strong commitment to serving customers and communities. As part of a stronger, larger company, Martin Marietta and Texas Industries employees will benefit from greater career and professional development opportunities created by this transaction.
Management, Board Composition and Headquarters
After the close, the combined company, which will operate under the name Martin Marietta Materials, Inc., will be headquartered in Raleigh, N.C,. and will maintain a significant presence in Dallas. Ward Nye and the rest of the Martin Marietta executive team will lead the combined company. Top talent across the combined organization will be retained based on a "best athlete" approach.
An individual jointly selected by Martin Marietta and Texas Industries will be appointed to the Martin Marietta Board of Directors.
Timeline and Approvals
The companies anticipate closing the transaction in the second quarter of 2014. The transaction is subject to regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions. The transaction is also subject to the approval of Martin Marietta and Texas Industries shareholders.
Texas Industries' two largest shareholders, representing approximately 51 percent of shares outstanding, have agreed to vote all of their shares (or in some limited circumstances, about 35 percent of the outstanding shares) of Texas Industries common stock in favor of the transaction.