It’s a big deal when a Latin American company acquires a US or European firm, even more so when it represents the biggest acquisition ever by a company from the region. Cemex’s $2.9 billion acquisition of US-based Southdown strengthens Latin America’s role in global industry consolidation, making it this year’s merger and acquisition deal of the year.
Salomon Smith Barney, which advised Cemex on the Southdown acquisition, recommended the US cement maker to Cemex as a possible target at the end of 1999 as a way of diversifying the Mexican company’s revenue flows. By acquiring a large cement producer in a developed market, Cemex expects to increase the balance and stability of revenue flows and so make borrowing cheaper.
“Southdown is very exciting for us. Our portfolio now has more revenue from the United States,” says Héctor Medina, executive vice president of planning and finance at Cemex.
“We have the platform we need to continue our business model on investing in the growth of developing markets in Asia and Central America,” says Rodrigo Treviño, chief financial officer at Cemex.
After months of negotiations, Cemex acquired 91.7% of Southdown for $2.9 billion, paying $73 a share (Chase provided Cemex with a fairness opinion). Cemex paid a 20% premium over Southdown’s share price of $55. By acquiring Southdown’s participation in the cement industry in the United States, Cemex lowered its cash flow from operations in Mexico to 48% from 60%, while increasing its cash flow from the US to 22% from 6%.
“Mexico is profitable for Cemex but investors penalize the company because of Mexico’s risks. Southdown brings a better mix,” says Adolfo Ríos, co-head of Latin American mergers and acquisitions for Salomon. Medina says Cemex’s US market share will increase four times, bringing revenues to an estimated $2 billion from $500 million with higher demand due to national highway improvement programs.
Cemex raised about half the purchase price with a $1.4 billion loan from Citibank. The rest came from a bridge equity facility from Chase and Deutsche Bank. The loan is payable with funds or equity following a planned IPO by Cemex’s Spanish subsidiary, Valenciana de Cementos, which Cemex hopes will raise $1.5 billion. Moody’s estimates that Cemex would have to sell about 20% to 25% of Valenciana to raise $1.5 billion.
Says Steve Wolitzer, managing director and co-head of global mergers and acquisitions for Lehman Brothers, advisor to Southdown, “For Cemex this deal makes a lot of sense. The company wanted to expand and Southdown is the largest cement maker in the US.”
Cemex’s acquisition is part of a trend. In 1999, Grupo México acquired US-based Asarco, the copper and metal producer. In 1999, Carlos Slim’s Grupo Carso bought CompUSA, the computer retail network. In the past, mergers and acquisitions involving Latin American companies purchasing assets abroad were usually small.
Latin American mergers and acquisitions totaled $61 billion in 2000 and Ríos expects there will be more large-scale cross-border transactions in the next couple of years. “Mexico, and Latin America in general, will be important players in the globalization game. We will continue seeing Latin American companies buying assets in the United States, Europe, and Asia,” says Ríos. So far, Mexican companies are the only ones to make large foreign acquisitions.
Hostile takeovers are rare in Latin America, but in June, the Virginia-based power company AES successfully acquired 80% of Electricidad de Caracas (EDC) for $1.66 billion, advised by Morgan Stanley Dean Witter. Then AES struck again, acquiring 96.5% of Chilean generator Gener, after it had interrupted negotiations for an agreed sale to France’s TotalFinaElf.
Morgan Stanley also helped the company launch a 10-year, $850 million bond to finance the purchase of EDC. Alastair Maxwell, a principal in charge of Latin American utilities, says, “Between October and November of 1999, rumors of our intentions began circulating in the market and the share price went up. So, we waited around a bit and as the political situation became more uncertain, the stock fell and we thought it was the appropriate time to make an offer.”
Victor Josebachvili, managing director and vice chairman for Latin America at Chase prior to the merger with JP Morgan, and advisor to EDC, says, “This was one of the first times in Latin America that a board decided to fight an unsolicited offer to get a better deal for their shareholders. AES increased the original bid from $23.50 per ADR, or $853 million for 51% of the company, to $28.50 per ADR or $2.1 billion for 100%.”
In January, Spain’s Telefónica completed a $16.7 billion offer to minority investors for their shares in four of its Latin American subsidiaries. Goldman Sachs and Morgan Stanley Dean Witter coordinated one of the most complex transaction yet seen in the region’s equity markets, which took Telefónica de Argentina, Telefónica del Perú, and Telesp and TeleSudeste in Brazil private, delisting them from local stock markets. The deal was the largest equity exchange offer in Latin America and the largest merger and acquisition for the region.