Inside Wall Street: Marietta's hostile bid for Vulcan

Deal or not, the two will continue to be the industry’s leaders and long-term attractive plays.

By Gene Marcial Dec 22, 2011 10:32AM

This is a case of No. 2 trying to gobble up No. 1. It won’t happen -- not yet, anyway.


The prevailing sentiment on Wall Street is that Vulcan Materials (VMC) will reject the unsolicited $4.8 billion buyout offer of Martin Marietta Materials (MLM). Vulcan, the largest U.S. producer of gravel and sand, has to decide in a few days whether or not to embrace the all-stock hostile bid by Martin Marietta, the second largest maker of construction aggregates. This may well be a protracted battle as Vulcan is expected to ask Marietta to back off, unless it raise the ante.


Indeed, the market already is acting like it expects a higher bid. Vulcan’s stock surged some 14%, to $38.70 share on Dec. 12, 2011, the day Marietta made public its takeover design after weeks of privately trying to convince Vulcan to do a deal. Marietta’s stock has also risen, from $75 the day it made the takeover bid, to more than $76, reflecting the market’s optimism that the game isn’t over.


"We expect Vulcan will reject the hostile offer as not reflecting the value of the company," says Trey Grooms, analyst at investment bank Stephens. "We think Vulcan will likely reject Marietta’s offer" for several reasons, including the question of who will lead the combined company and what the composition of the board of directors will be, says Rodny Nacier, analyst at KeyBank  Capital Markets.

Robert C. Wettenhall Jr. of RBC Capital Markets, too, expects Vulcan to reject the current offer as "being too low." He estimates the stock is worth $45 a share. "There would be significant synergies from this combination," argues Stuart J. Benway of Standard & Poor's. Consequently, he has raised his price target for Vulcan to $40 a share, much higher than his extraordinarily low earlier target of $27, as he expects a higher bid from Marietta.


So the question for investors is whether Vulcan, obviously now in play,  is a buy. Vulcan has to be a buy at this point because even if Marietta walks away, a floor has been established for the stock’s value and it’s likely to attract other bidders, including possibly private capital equity funds. But the best possibility is that Marietta will come back with a bigger offer because it’s the only chance for it to instantly become No. 1 in the industry.


The Marietta offer, which values Vulcan at a 15% premium to its average closing price of $32.49 in a 10-day period ended Dec. 9, 2011, would create shareholder value in several ways, says RBC Capital’s Wettenhall, including cost-cutting synergies estimated by Marietta at $200 million to $250 million in two to three years. Apart from becoming the dominant player in the aggregates industry, Marietta also offers to boost the combined annual dividend to 80 cents a share from Vulcan’s current dividend of 4 cents. That, indeed, is a very attractive incentive for shareholders.

Wettenhall adds that the deal is likely to be approved by regulators with minimal required divestitures because of the localized nature of aggregates production, with little geographic overlap.


Wettenhall argues that Marietta’s move reflects its management’s confidence in the ability to more efficiently operate Vulcan’s high-quality asset base. Neither does the analyst see other potential bidders outbidding Marietta. It is the one that’s best equipped to realize synergies, "which should discourage third parties from entering the bidding," says Wettenhall.


The wrong move is to sell or short Vulcan’s stock, says Stephen's Trey Grooms. He suggests that current shareholders hold on to their shares, and wait to see what Marietta does. For short-term investors or traders, however, it’s the right time to buy more

Vulcan shares, he adds, as there is the likelihood that a higher bid will come from Marietta. And when a deal is done, which he says makes sense for Marietta, the company will be in the catbir'’s seat as it would be able to gain significantly more market share.


One possible deal breaker, however, is Marietta’s intention of controlling the board and its plan aims to propose the nomination of five people to Vulcan's board for consideration at its next annual shareholder meeting scheduled for May, 2012. Even if the merger is approved, Vulcan will control the combined company. According to the proposed terms, Vulcan shareholders will control 58% of the combined company. So the question of who will sit on the board and who will be the new leaders of the combined company will be crucial key points.


On the whole, however, should those issues be resolved as I expect they will be, including the question of raising the bid price, the buyout deal is attractive enough for Vulcan shareholders. "While one can argue that Marietta is trying to 'steal' Vulcan at the trough, we note that the proposed stock deal would allow Vulcan holders to continue their ownership of a market-leading aggregates company –- a bigger one," says Stern Agee analyst Kevin Bennett,  because it would create the 'biggest rock company on earth." Vulcan shareholders would see their company financially revitalized, he adds.


As for Marietta shareholders, they would also benefit over the long run as the new company would have "improved market power," argues Bennett, who reiterates his buy recommendation on Marietta, with a price target of $90 a share.


Bottom line: There are good reasons to buy shares in both Vulcan and Martin Marietta, whether or not they agree to do a deal. Vulcan would be the immediate big winner if Marietta raises the bid and is okayed by Vulcan. Marietta won’t be shellacked even if it fails to win Vulcan as it will continue to have options to grow organically, or possibly through smaller acquisitions. And, of course, if it wins Vulcan, it would be a big gainer over the long run.

Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.


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