CEMEX, S.A.B. de C.V. (CX) announced that it will buy its partner’s interests in the two joint ventures with Ready Mix USA, estimated to be around $360 million. The assets comprise cement, aggregates, ready mix and block assets located in south eastern USA.
The deal is part of a put option exercised by Ready Mix USA. Pursuant to the closure of the deal, which is expected to take place in September 2011, CEMEX will also consolidate approximately $17 million in net debt held by one of the joint ventures.
The two joint ventures were created in 2005. The joint venture operated by CEMEX owns the Demopolis cement plant in Alabama, Clinchfield cement plant in Georgia and 12 cement terminals. The other joint venture operated by Ready Mix USA owns 10 sand and gravel pits, 149 concrete plants and 20 block plants located throughout the states of Arkansas, Mississippi, Tennessee, Alabama, Georgia and Florida. Ready Mix USA will continue to manage this joint venture until the transaction closes.
CEMEX had $748 million in cash and cash equivalents as of June 30, 2010 compared with $921 million as of June 30, 2009. The company can thus comfortably buy these assets. These investments will enhance the revenue earning capacity of CEMEX. However, the transaction will enhance its debt level, which is a concern.
Lately, CEMEX has been selling non-productive assets to reduce its debt. Following its acquisition of Rinker Group Limited, an Australian producer of construction materials, for $14.2 billion (which does not include $1.3 billion of assumed debt), CEMEX has been reeling under substantial debt. CEMEX’s net debt plus perpetual securities was approximately $17.1 billion at the end of the second quarter (June 30, 2010) compared with $18 billion at the end of the first quarter (March 31, 2010). CEMEX projects a free cash flow target of $680 million for fiscal 2010, of which an estimated $400 million has been slated for debt payback.
In August, in another attempt to prune its debt, CEMEX sold seven aggregates quarries, three retail aggregate distribution centers and one concrete block manufacturing facility in Kentucky to Bluegrass Materials Company, LLC, the wholly owned subsidiary of Panadero Aggregates Holdings, LLC, for $90 million.
On Labor Day, President Barack Obama proposed a new $50 billion plan, to be spent over six years, to improve roads and other infrastructure in the U.S. The funding is intended for the reconstruction of 150,000 miles of road, the construction and maintenance of 4,000 miles of rail and the rehabilitation or reconstruction of 150 miles of runway, as well as the implementation of the NextGen air traffic control system. Once approved, CEMEX stands to benefit from the higher cement demand.
CEMEX competes globally with France’s Lafarge SA (LFRGY) and Switzerland’s Holcim Ltd. (HCMLY) and has been struggling with a sluggish U.S. housing market, weakness in Spain and high debt levels. We appreciate CEMEX’s efforts to strategically align itself as a leaner and more agile company, following its debt refinancing, equity capital issuance, cost-reduction efforts and sale of Australian operations and non-core assets. We maintain a Hold rating on CEMEX hoping its initiatives would bear fruit and awaiting more visibility on the proposed U.S. government funding $50 billion plan. CEMEX currently retains a Zacks #3 Rank (Hold).
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