Before buying RMCC, Cementos Argos also bought Southern Star Concrete of Irving, Texas, from TGF Management Corp., manager of the Texas Growth Fund. McColl Partners was the investment banking firm representing Southern Star during the transaction, and was also advisor to RMCC during its sale to Audax. McColl described these sales as, “the two largest transactions involving independent ready-mixed concrete companies in the United States.”
To investors and foreign companies, concrete may look like a relatively safe bet. In the United States, other materials are more costly and concrete seems destined for a starring role in the green building movement. Concrete is also a cash-rich business that suffers few fluctuations, unlike other materials such as steel and timber.
It can be a more attractive investment than aggregate operations, with less long-term environmental risk and a faster due diligence process. After years of trying their hand in more volatile and unpredictable industries, investors can hedge their risks with an industry that seems more stable.A down market
“Stable” is a diplomatic description of concrete production in 2006. After a strong start in the first quarter, producers began to feel the impact of slowing residential construction. The National Ready Mixed Concrete Association (NRMCA) estimated production in 2006 at 456 million yards, valued at about $30 billion. This was down slightly from 458 million yards in 2005.
Economists don't expect much improvement in 2007. NRMCA projects 430 million cubic yards of production for 2007. This does not include precast and pre-stressed products. In spring, Ed Sullivan, chief economist for the Portland Cement Association (PCA) predicted a 3% decrease in construction spending for 2007. Lower home equity and slower economic growth will hinder construction, he said.
McGraw Hill Construction reported a 17% decrease in construction in the first quarter. “The weak residential sector continues to shape the pattern for overall construction activity,” says Robert Murray, vice president of economic affairs for McGraw Hill Construction. “Renewed expansion is not anticipated anytime soon.”
Total volume in other sectors has also decreased since 2006. Non-residential is 3% lower, and non-building construction is down 2%. But Murray expects the decline in residential building to moderate in coming months.
Investors must be listening. “Things have slowed down since the flurry of investor activity a couple of years ago,” says Blackburn. He points out several factors, including a shortage of the right platforms, or producers, in which to invest; concern over the effects of the slower housing market; and a disconnect between the prices sellers want and what private equity firms are willing to pay.Looking for deals
But, Blackburn adds, “Producers should know that even though the opportunities may have slowed down a bit, there is no shortage of private equity firms looking for deals. The interest level is high, and there is still a lot of money out there.”
Despite the bearish economic news, producers seem optimistic that the industry is still going strong. Of the companies surveyed for the TCP100, 47% expect their net income in 2007 to be higher than 2006. That's 5% more positive than their responses last year. “We are already halfway to our goal for 2007,” says a new producer in Nevada.
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