Audax Group. Park Avenue Equity Partners. ShoreView Industries. These are some of the biggest names in today's concrete industry, but you won't find them painted on a ready-mix drum. That's because one of the world's most plentiful building materials has caught the eye of a group of people far away from dusty jobsites: private investors.
Managers of building material companies have used strategic acquisitions to strengthen their bottom lines since before cement was sold in bags. A producer buys a smaller one, streamlines the operation, and eventually enjoys bigger margins. It was only a matter of time before bankers decided they could do it just as well. Or even better.
The arrival of private equity groups was not new in 2006. Investors were already making blips on the radar screen with acquisitions in 2003. Now, we are realizing how far and wide the ripple effects of these deals can reach.
One of these ripples began in Boston and reached clear to Colombia, sweeping through North Carolina on the way. In late 2004, the Audax Group, a private equity firm, bought the Ready Mixed Concrete Co. (RMCC) in Raleigh, N.C. With operations in the Carolinas and Virginia, RMCC proved to be a lucrative investment. Audax resold the company to Cementos Argos in March 2006 for $435 million, about twice the original purchase price.
Another occurred in New York in 2005, when Park Avenue Equity Partners bought Meyer Material Co, a ready-mix and aggregates producer near Chicago. It ended when Aggregate Industries, a subsidiary of Holcim, bought Meyer in July 2006 as a foothold for new growth in the Midwest. (Recently, Park Avenue also acquired Coastal Concrete in Bluffton, S.C.)
An intriguing industry
Concrete professionals, including some who have made a career in the industry, might scratch their heads and ask, what makes private equity firms think they know about concrete operations? Can pencil-pushers really understand how to keep a ready-mix or precast plant running, much less improve it?
“A private equity firm can provide capital, strategic guidance, and board-level participation to turn a 500,000 yard producer into a 2 million yard producer,” says Alan Blackburn, managing director of Gulf-Star Group Investment Bankers. Blackburn has more 20 years of experience as an investment banker, with particular expertise in the construction materials industry. “The primary reason for a private business owner to get involved with an investment firm is to grow the business with a partner and still maintain some independence, rather than being folded into a larger company.”
Investors seem to be following a trend that's been popular in the industry for years, but are adding a twist. Rather than absorbing a company into a larger operation and then looking for ways to streamline the two businesses, investors first look for ways to make individual companies more efficient, and then sell them as good acquisition candidates to other businesses.
When companies in the business, or “strategic buyers,” acquire and consolidate other companies, it's generally with the goal of expanding and strengthening the industry. But investors acquire producers to realize a return on their money, and establish a track record of successful investments. “Most of these partnerships have a limited lifespan,” says Blackburn. “It's just a matter of time before the producer will be for sale again.”
When investors act as middle-men, they can increase the value of smaller companies. They spend their time and money making businesses more profitable, so acquiring companies don't have to. In cases like this, an investor's involvement can work to the industry's advantage.
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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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On the other end of the spectrum, 24% of producers expect profits to decrease. A mid-sized precast/prestressed producer in Pennsylvania says, “We are off to a slightly slower start in 2007 versus 2006.”
Although factors such as the economy are beyond producers' control, they can still adopt some of investors' strategies to gain an edge. Thinking like an investor is the best way to avoid being targeted in the acquisition frenzy. Many of the biggest players are already following this model by becoming more efficient and gaining higher margins through expansions, acquisitions, and using technology.
One of the most striking differences between small and large players is the number of products they sell. (In this case, small producers' revenue is less than $35 million; large, more than $35 million.) In our survey, 41% of small producers reported revenue from a single product, compared to only 17% of large producers. On the other hand, 45% of large producers have three or more product lines, compared to only 20% of smaller operations.
Diversifying product lines, through expansion or acquisition, is one of the most important keys to growth. By offering more products, big producers can be involved in more aspects of construction. If ready-mix sales are down, they can rely on block or precast products.
There were several examples in 2006. U.S. Concrete bought six companies in 2006, acquiring assets worth $208 million from New Jersey to California. They also partnered with the Edw. C. Levy Co. to create Superior Materials, the largest ready-mixed concrete producer in Michigan. Titan America changed the landscape in the Southeast, acquiring companies in Kentucky, Virginia, and South Carolina. Italcementi Group invested more than $70 million to expand its Essroc operations in North America.
Expanding product lines may be a factor in the changing amount of ready-mix sold in 2006, compared to just a few years ago. In 2002, ready-mix made up almost two-thirds of producers' sales. In 2006, it dropped to less than one-half. Manufactured concrete has tripled. Together with precast and prestressed concrete, these products now account for one-third of producers' revenue.
One factor: Producers are adapting to customers' demands for time savings and more cost-effective products. Concrete also is making headway against other materials, like steel and plastic, in applications such as bridge segments and pipe.
Concrete producers also seem to agree with investors and strategic buyers on the importance of investing in technology. They plan to spend a median of 5% of their capital budgets this year on information technology.
This may not appear to be a significant investment. But in 2006, the median IT spending reported across all industry sectors in the United States and Canada was only 2%, according to a Computer Economics “IT Spending, Staffing, and Technology Trends” study.
Half of producers say they plan to spend the same or more on IT this year. It's all part of rising to the top of the TCP100.
We rank the TCP100 by total revenue, not just concrete sales. Our goal is to show the wide spectrum of companies involved in the industry, whether ready-mix represents their entire business, or just a part. Producers are included by their parent company names.
Revenue figures for concrete producers were solicited by questionnaire and by telephone. Other revenue figures were obtained through company annual reports, press releases, Dun & Bradstreet, Hoovers, Manta, and media sources.
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