Vulcan Materials Activist Situation Report


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Vulcan Materials Activist Situation Report

  1. 1. The Shareholder Communication Strategists The objective of the Activist Situation Report is to highlight key issues that might be raised by the dissident investor in a proxy contest. This report is not intended to provide voting recommendations. For a more detailed discussion of our analysis, please contact Waheed Hassan, CFA at or 202-549-8399. Summary • On December 12, 2011, MLM publicly disclosed its unsolicited bid for Vulcan stock by offering 0.5 shares of MLM stock for each Vulcan common stock. Concurrently, MLM also commenced an exchange offer for all of the outstanding shares of Vulcan common stock. The Exchange Offer is scheduled to expire on May 18, 2012, unless further extended by MLM. Since 2010, Vulcan and MLM had engaged in potential merger discussions but failed to reach an agreement. • Following rejection of its offer, MLM initiated a proxy contest to replace five incumbent nominees at Vulcan. MLM hopes that election of its nominees would send a strong message to Vulcan board and management team to engage in merger negotiations. • Given that this is an M&A driven proxy contest, Vulcan shareholders have to decide if a) the offer is reasonably certain; b) the value being offered is a reasonable starting point for engagement; and c) whether Vulcan’s board response was appropriate. • The proposed merger between Vulcan and MLM makes strategic sense. However, our review of MLM’s offer suggests that it is not in the range of what Vulcan shareholders might deem as ‘reasonable’. The offer – though certain – provides a meager premium and is almost at par with Vulcan’s stand-alone valuation. Consequently, we believe, in absence of a higher offer by MLM, Vulcan shareholders might conclude that the offer is not a reasonable starting point for engagement and therefore MLM nominees do not deserve a seat at the table – board representation. • Despite inadequacy of tender offer, MLM may still succeed in proxy contest because of the significant overlap in the top holders of both companies. These holders may drive the election of dissident nominees to Vulcan’s board, strictly because they will benefit financially from a merger of the two companies. Target: Vulcan Materials Company (VMC) Activist/Dissident: Martin Marietta Materials Inc. (MLM) Offer: 0.5 shares of MLM stock for each VMC share At stake: 5 seats on an 11-member board Board composition: Classified board Meeting date: TBD. Last shareholder meeting was held on 05/13/2011. Probable outcome: In absence of a higher bid, management nominees are re-elected. March 9, 2012
  2. 2. The Shareholder Communication Strategists 2 Analytical Framework Alliance Advisors utilizes the same analytical framework that Institutional Shareholder Services (“ISS”) and many institutional investors use when evaluating M&A related contested solicitation efforts. Generally, ISS focuses on the following three key considerations for shareholders: 1. Is the offer reasonably certain? 2. Is the value being offered a reasonable starting point for engagement? 3. Has the target board’s response been appropriate? Note that questions 1 and 2 are critical in determining if dissidents warrant board representation. Meanwhile, question 3 tries to ascertain if the target board acted in the best interest of its shareholders. Question 1 – Is the offer reasonably certain? MLM’s all-stock offer is not subject to financing condition. That said, MLM shareholders would have to approve issuance of shares for the proposed merger. The risk of MLM shareholders not approving the deal is fairly limited. As such, the offer can be deemed to be reasonably certain. Question 2 – Is the offer a reasonable starting point for negotiation? Historical Exchange Ratio • MLM’s offer of 0.5 shares of MLM stock for each Vulcan share does not compare favorably with the historical exchange ratio for the two companies. The offer represents a 9.3% premium to the unaffected exchange ratio on 12/9/2011, a much smaller 5.4% premium to the 1-year average exchange ratio and a 4.6% discount the 3-year average exchange ratio. • Additionally, during periods of stronger economic growth – pre-2008 economic crisis – Vulcan traded at a significantly higher exchange ratio than MLM’s offer. Given the low implied offer premium, it seems unlikely that Vulcan shareholders would support MLM nominees in absence of a higher offer. • Based on the exchange ratio and MLM’s current share price ($86.39 as of 3/8/2012), the $43.20/share offer represents a 3.8% discount to Vulcan’s current share price. Though the offer discount is indicative of market’s desire for a higher price, we believe Vulcan shareholders are unlikely to support MLM’s bid for board seats unless they see a revised offer which provides a reasonable premium.
  3. 3. The Shareholder Communication Strategists 3 Historical Exchange Ratio Source: Thomson Reuters. Data as of 3/8/2012. 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 3/7/2007 5/7/2007 7/7/2007 9/7/2007 11/7/2007 1/7/2008 3/7/2008 5/7/2008 7/7/2008 9/7/2008 11/7/2008 1/7/2009 3/7/2009 5/7/2009 7/7/2009 9/7/2009 11/7/2009 1/7/2010 3/7/2010 5/7/2010 7/7/2010 9/7/2010 11/7/2010 1/7/2011 3/7/2011 5/7/2011 7/7/2011 9/7/2011 11/7/2011 Historical Exchange Ratio (as of 12/9/2011) Historical exchange ratio 1-yr avg 3-yr avg Offer 3-yr avg. exchange ratio:0.52x 1-yr avg. exchange ratio:0.47x
  4. 4. The Shareholder Communication Strategists 4 Precedent Transaction Analysis • MLM’s implied valuation is significantly higher than that for precedent transactions, suggesting that the offer is reasonable. It is important to note that the precedent transactions took place during robust market conditions, i.e., at relatively high market valuation. That said, we believe Vulcan could contend that MLM’s implied valuation is high not because of offer premium but instead due to depressed EBITDA given the cyclical trough for the underlying business. For instance, Vulcan’s EBITDA declined from $980.6 million in FY07 to $425.2 million in FY11. Overall, we feel that Vulcan’s argument is likely to resonate with investors. In a normalized business environment, Vulcan’s EBITDA would be higher, resulting in a lower implied valuation multiple for MLM’s offer. Consensus estimates suggest Vulcan’s EBITDA will increase to $589 million by FY2013 and $718 million by FY14 (source: Thomson Reuters). Precedent Transactions Source: FactSet; precedent transactions data taken from Florida Rock Industries proxy statement. Date Announced Acquiror/Target EV/LTM EBITDA Feb-07 Vulcan Materials/Florida Rock 11.0x Oct-06 Cemex/Rinker Group 9.4x Jun-06 Cementos Portland Valderrives/Corporacion Uniland 13.2x May-06 Lafarge SA/Lafarge NA 8.3x Jul-05 Spohn Cement/HeidelbergCement 8.1x Oct-05 Camargo Correa/Loma Negra 11.6x Jan-05 Holcim/Aggregate Industries 9.8x Sep-04 Cemex/RMC 7.6x Median 9.6x Mean 9.9x 9-Dec-11 Martin Marietta/Vulcan 18.3x
  5. 5. The Shareholder Communication Strategists 5 Stand-Alone Valuation • Both our stand-alone valuation analysis and analysts’ target price estimate for Vulcan suggests that MLM’s offer does not represent any significant premium. While MLM is likely to contend that it is seeking a “merger of equals” transaction and hence did not offer “acquisition premium”, Vulcan shareholders are likely to treat MLM’s hostile offer as an acquisition of the Company instead and therefore demand a premium. Summary Valuation Analysis Source: Thomson Reuters. Data as of 3/8/2012. Unaffected Trading Multiples Source: Thomson Reuters/FactSet. Data as of 3/8/2012. Peer group is comprised of MLM, CRG-DB, HEI-XE, HOLN-VX, LG-FR, MDU-US, EXP-US, TXI-US, CEMEX.CPO-MX. Valuation Calculation Source: Thomson Reuters/FactSet. Data as of 3/8/2012. Stand-alone value Initial Offer Price (12/9/2012) Premium/ (discount) Current Offer Price (03/8/2012) Premium/ (discount) EV/NTM EBTIDA $45.5/share $36.7/share -19.4% $43.2/share -5.1% Analyst Target Price (Mean) $43.6/share -15.9% -1.0% At announcement 12/9/2011 EV/NTM EBITDA Peer Median 7.9x Vulcan 16.7 Premium/(Discount) 112.7% Vulcan's implied trading multiple EV/NTM EBITDA Current Peer Median (3/8/2012) 8.3x Adjustment for Vulcan historical premium/(discount) 112.7% Implied multiple 17.6x Vulcan's Valuation Estimate EBITDA Vulcan's NTM consensus estimate (FY2012) $480.6mn Implied Enterprise Value 8,462.8 Less Debt (as of 12/31/2011) 2,815.4 Add Cash (as of 12/31/2011) 236.8 Implied Equity Value $5,884.2mn Shares outstanding 129.2mn Implied Stand-alone value $45.5/share
  6. 6. The Shareholder Communication Strategists 6 Analyst Estimates Source: Thomson Reuters. Data as of 3/8/2012. Vulcan’s 5-year EV/NTM EBITDA Multiple Source: Thomson Reuters. Data as of 3/8/2012. Peer group is comprised of MLM, CRG-DB, HEI-XE, HOLN-VX, LG-FR, MDU-US, EXP-US, TXI-US,CEMEX.CPO-MX Target Price (USD) Mean 43.63 Median 42.50 High 61.00 Low 29.00 Standard Dev 10.45 Total # 8 0 2 4 6 8 10 12 14 16 18 20 Historical EV/NTM EBITDA as of 12/9/2011 VMC Peer Median
  7. 7. The Shareholder Communication Strategists 7 Synergies • Vulcan and MLM have very divergent views of the level of synergies that can be achieved by combining the two companies. Vulcan estimates potential synergies at $75-$100 million versus MLM estimate of $200-$250 million. Our calculations show regardless which synergy estimate one believes, shareholders would benefit significantly from a combination of the two companies. Our two key assumptions for the said calculations are: (a) EBITDA is increased by the amount of synergies; and (b) post-merger the combined entity would trade at MLM’s current EV/NTM EBITDA multiple. Synergies Source: Thomson Reuters. Data as of 3/8/2012. Merger related expense from MLM’s SEC filings. Vulcan estimate MLM estimate Synergies (low-end of the range) $75.0mn $200.0mn MLM - EV/NTM EBITDA multiple (current) 12.0x 12.0x Increase in Enterprise Value due to synergies $901.5mn $2,404.0mn Less merger related expense 75.0mn 75.0mn Net impact of synergies on Enterprise Value $826.5mn $2,329.0mn Post-merger shares outstanding 110.2mn 110.2mn Synergy value per share $7.5/share $21.1/share Synergy value % of current offer ($43.2/share) 17.4% 48.9%
  8. 8. The Shareholder Communication Strategists 8 Question 3 – Has the target board’s response been appropriate? Given that Vulcan has yet to file its proxy statement, it is difficult to assess the appropriateness of its board’s response. The discussion below is based upon MLM’s preliminary proxy statement, a current source of public information regarding Vulcan’s response to MLM’s offer. As such, it highlights a potential conflict of interest on Vulcan’s part, as identified in MLM’s preliminary proxy. • Our analysis above suggests that MLM’s offer is not compelling enough and that Vulcan shareholders would require an improved bid to support the merger. That said, our read of the preliminary proxy statement filed by MLM indicates potential conflict of interest. • Specifically, we note that during negotiations Mr. Donald James – CEO of Vulcan – insisted on retaining CEO/Chairman position along with control of the top management team of the post- merger entity. While discussion of post-merger management team is not unusual, generally such details are finalized towards the end of a merger agreement after financial considerations have been settled. In this case, however, it appears that Mr. James’ role in the post merger management team assumed critical significance in the merger discussions. Below are some relevant excerpts from the preliminary proxy statement. June 16, 2010 – “Mr. James also stated Vulcan’s position that Mr. James be chief executive officer of the combined company for a period of three years, followed by an additional period of three years in which he would serve as executive chairman of the board of directors.” (Page 9.) November 3, 2010 – “Mr. James indicated that he believed that he should have the role of Executive Chairman and Mr. Nye should have the role of President, with no chief executive officer of the combined company. They also discussed the composition of the board of directors of the combined company and the location of the combined company’s headquarters.” (Page 10.) April 25 and 26, 2011 – “Mr. James proposed that he manage the combined operations with direct responsibility for legal, finance, government affairs, strategic planning and Board management functions, with investor relations, human resources, business development, and operations functions reporting to Mr. Nye., Mr. James proposed that after an agreed-upon transition period, Mr. Nye would become chief executive officer of the combined company.” (Page 11.) June 27, 2011 – “Mr. James told Mr. Nye that Vulcan would only be interested in a business combination with Martin Marietta at the market exchange rate without any premium to Martin Marietta, in which Mr. James would be chairman of the board of directors and chief executive officer, with a majority of senior management positions held by Vulcan personnel for a transition period.” (Page 11.)
  9. 9. The Shareholder Communication Strategists 9 Impact of Overlapping Shareholders • Given the strategic merits of the deal, shareholders desire to see a combination of the two companies might lead to greater support for MLM nominees. In January 2012, Southeastern Asset Management (9.9% stake in Vulcan and 13.3% in MLM) issued a public letter stating that “If Vulcan's management and board of directors ignore Martin's invitation to resume talks, we will be forced to vote for Martin Marietta's slate of directors and also contemplate publicly sharing these views with other Vulcan Materials stakeholders.” • Lastly, there is a significant overlap between the top 10 shareholders of both companies. This creates the possibility of such holders supporting MLM nominees even if it doesn’t put the best offer on the table. By virtue of being significant holders in both companies these shareholders stand to benefit from the transaction regardless of whether Vulcan receives the highest price. Common Shareholders of MLM and Vulcan Source: Thomson Reuters. Data as of 3/8/2012. Conclusion Our review of MLM’s offer suggests that it is not in the range of what Vulcan shareholders might deem ‘reasonable’. The offer provides a meager premium and is almost at par with Vulcan’s stand-alone valuation. Consequently, we believe MLM has not met the burden to warrant a seat at the table – board representation. That said, given the significant overlap between the top shareholders of both companies there is a possibility that these overlapping shareholders would support MLM nominees even if MLM doesn’t put the best offer on the table. % of common shares outstanding MLM Vulcan Southeastern Asset Management, Inc. 13.33 9.87 Vanguard Group, Inc. 4.06 5.22 First Eagle Investment Management LLC 5.08 4.48 BlackRock Institutional Trust Company, N.A. 5.02 4.42 Total 27.49 23.99
  10. 10. The Shareholder Communication Strategists 10 Disclaimer: No information available through this report is intended to constitute advice or endorsement of any investment, tax or legal matter. Alliance Advisors believes the information contained in this report to be reliable and correct. However, Alliance Advisors makes no representation or warranty (express or implied) as to the accuracy, completeness or continued availability of the information, materials and data available in this report. To the fullest extent permissible under applicable law, Alliance Advisors accepts no responsibility or liability of any kind with respect to the accuracy or completeness of the information, materials and data in this report. Copyright © 2012 by Alliance Advisors, LLC. ALL RIGHTS RESERVED.