Monday 20 November 2017

Analysis: CRH rolls the dice in big bet on unproven management ability

Thomas Molloy

Thomas Molloy

CRH is placing a very big bet on its management skills after growing slowly over recent decades with a series of small, well executed and cautious deals.

While the Clondalkin-based building materials giant is not quite putting everything on black, it is certainly taking a big risk by spending a sum which is roughly half of the company's market capitalisation.

A deal like this can only work if the numbers are right and management has the capacity to follow through on the projected synergies.

The omens are good but this is no slam dunk; while the figures look fine in a certain light there are reasons to be cautious about management's ability to deliver.

Clearly this deal is opportunistic - the sort of thing deal of a kind that only comes along once or twice in a generation. CRH was fortunate to be in the right place at the right time after a significant disposals programme. After years of selling off units, CRH was in the position to make an aggressive bid for the unwanted bits of the Lafarge-Holcim empire when the merger was announced.

All credit must go to the management team for being in a position to pay this sort of money following the financial crisis.

They have sold off many units at high multiples and are now in a position to buy at reasonable prices.

The good news is that assets are substantially accretive to earnings and returns from year one, according to Goodbody which is acting for CRH.

The deal will also give the company some new platforms for growth in both emerging and developed markets and double the company's exposure to the developing world although the focus remains firmly on Europe where the economy is still weak.

In North America, CRH will add sales of €1bn. In Europe, the company will expand significantly in old stomping grounds such as UK, France and Germany while also doubling exposure in Slovakia, Serbia, Hungary and Romania.

In the developing world, CRH is moving into Brazil and the Philippines.

The price seems about right although some analysts believe CRH has overpaid. Based on EBITDA of around €752m last year, CRH is buying at a historic multiple of 8.6 times and that's without any cost savings. CRH expects to be able to extract synergies of €90m or 1.8pc of acquired sales.

These figures look okay but question marks still hang over management's capacity to deliver. CRH never recovered from the retirement of Liam O'Mahony in late 2008. Since then, it has tended to sell rather than buy.

Even chief executive Albert Manifold concedes that CRH has made some bad deals by buying into market trends but claims this deal is different because the assets fit well with existing operations.

Let's hope so but the jury is out on whether the company has the capacity to digest a deal this big and extract savings that will secure CRH's future for another generation.

Irish Independent

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