A series of bold acquisitions has turned Mexico’s Cemex from a provincial company to a global player in just over a decade. The company’s latest leap forward came in September when it acquired Britain’s RMC Group for $5.5 billion in cash and assumed debt, paying a tidy 39% premium for the company.
In that single move – the largest acquisition yet by a Latin American company – Cemex established itself in the heart of the European market. RMC’s franchise includes both the mature UK and German markets and promising new territories in eastern Europe.
The acquisition had the classic traits of a Cemex deal. It was a large and highly leveraged takeover of an underperforming company that has fundamental strengths. Although Cemex took on $5.8 billion in debt, past experience shows it will quickly wring substantial savings out of RMC. Cemex is skilled at brutally eliminating inefficiencies to cut debt rapidly and start generating substantial cash flows. Cemex Chairman Lorenzo Zambrano and his executive team are past masters at post-acquisition integration.
The deal creates the world’s second-largest cement company, confirms the vision and energy of Zambrano and his lieutenants and earns LatinFinance’s prize for best M&A Deal of the Year. The RMC purchase complements the company’s existing Spanish operations and balances its heavy exposure to North America through its US and Mexican subsidiaries.
Cemex, advised by Citigroup and Goldman Sachs, launched a cash tender offer for 100% of RMC. Citigroup provided sufficient committed financing at the date of the announcement in September, ensuring that Cemex had the resources to follow through. The agreed takeover offer was made public two weeks after first contact with RMC management, and Cemex was able to acquire 20% of RMC’s stock within an hour of the merger announcement. The deal had an equity value of $4.11 billion plus $1.39 billion in debt assumption.
Cemex has spent $11.95 billion on 36 acquisitions since 1989, increasing leverage substantially as it went. The RMC deal surprised the markets because Cemex was working aggressively to cut its debt. Net debt had dropped to 2.2 times EBITDA just before the acquisition, compared to 3 times in the year ending June 30, 2004.
Citigroup had also worked with Cemex on its $2.8 billion acquisition of US-based Southdown Cement in 2000. In both cases, the bank’s ability to line up substantial financing was key.
The $5.8 billion RMC package consisted of three multi-tranche facilities, each raised by three Cemex subsidiaries from banks in Mexico, Spain and the Netherlands. The loans had tenors ranging from one to five years and were denominated in US dollars, Mexican pesos, euros and British pounds. The subsidiaries channeled the funds to a Cemex unit in the UK through inter-company loans or equity contributions. The British unit then purchased RMC stock and refinanced its $1.7 billion in loans.
This web of financing facilitated global syndication of the loans and matched them to the cash flows generated by the contributing subsidiaries. Channeling the loans through its subsidiaries allowed Cemex to optimize its capital structure and to involve a greater number of banks in the syndication, which further reduced costs.
The legal advisers to Cemex were Skadden Arps Slate Meagher & Flom and Slaughter and May. The legal advisers to RMC were Linklaters and Jones Day.
The loan structure has features to minimize refinancing risk and to enable Cemex to reduce leverage as soon as is practicable, by allowing optional tenor extensions, revolving loans and term loan amortization schemes. With the RMC deal, Cemex’s debt jumps to about 3.3 times EBITDA, an increase of 50%. Still, the company and its bankers vow to cut debt to 2.7 times EBITDA by the end of 2005.
The RMC deal, with a complex financing structure involving different jurisdictions and currencies, is an outstanding example of how open markets and free flow of capital are shaping today’s business world. Already used by US and European multi-nationals, these structures will become more common for Latin American corporates that – like Cemex – spread beyond their home markets.
Although Cemex has bought an average of three companies a year in the last decade, it will probably take the company a while to digest RMC before setting off down the M&A trail again. With Europe and North America covered, the company may focus next on emerging markets such as China, India or even Brazil. LF