Sunday 22 July 2018

Deal-hungry Manifold outlines plans for next phase of CRH growth

The chief executive of Ireland's biggest company wants more businesses in Europe and America

CRH chief executive Albert Manifold
CRH chief executive Albert Manifold
Gavin McLoughlin

Gavin McLoughlin

Mergers and acquisitions are very important for Ireland's biggest company, CRH. The boss of the cement giant, Albert Manifold, told reporters this week that two-thirds of the company's profits are created directly or indirectly through the acquisition process.

"If we don't have an acquisition road ahead of us, we're significantly impaired in our ability to create value and growth for our shareholders," he said.

This helps explain his decision to sell the company's American distribution business for some €2.2bn, announced this week. The deal - subject to regulatory approval - will see a division contributing pre-tax profit of €121m depart.

But it will also bring the company's M&A spending capacity to €3bn - enabling it to move decisively if a big deal arises.

Manifold believes the sale was the best way to maximise the business's value for shareholders. About five years ago, CRH's rivals started buying up assets at prices that CRH felt were too high.

Two companies - one of which is the buyer in this latest deal - had become the clear number one and two in the distribution market, with CRH a distant fourth. "The investment thesis had changed, because the fragmentation that was necessary for us to have acquisition opportunities was gone, and it became very consolidated and very expensive," Manifold said.

For that reason, the company has decided to take the money and run, boosting its capability for pursuing other earnings-boosting deals.

It is forking out €600m to acquire a German lime business called Fels. Manifold said the company has been eyeing the business for two decades and that it will complement CRH's existing activities in lime, making CRH Europe's second biggest player in that market.

With cheap cash flooding the world as a result of the current monetary policy environment, M&A valuations in some sectors have been getting high as investors search for yield. But Manifold said he hasn't seen much evidence of that in CRH's pipeline. Most of the companies it acquires are businesses that CRH already has a long-term relationship with, and it doesn't tend to get involved in auction processes, Manifold said.

Future deals are likely to come in sectors that the company already has a footprint in - creating more scope for synergies - according to Manifold. The same applies to geographies. The company has been experiencing some turbulence in the Philippines and that appears to have made Manifold wary of going after emerging markets.

"A lot of people get very excited about emerging markets, but the volatility we've seen in the Philippines just shows the exposure and risk there is with that. I think it's highly unlikely we'll be doing anything brave or heroic within emerging markets any time soon."

Instead, it is Europe and the company's most important market, the United States, where Manifold's gaze is mostly focused. In the US, he said the company was well-placed to benefit from an estimated 10pc in infrastructure spending over the next four years.

Manifold cites former US President Barack Obama's FAST (Fixing America's Surface Transportation) Act from 2015 as an important driver of this - alongside an expected uplift in spend from individual states.

"Specific initiatives that President Trump may or may not announce would be above and beyond that, but we don't factor that into our equations and we never did," Manifold said this week.

Davy analysts Robert Gardiner and Barry Dixon said the firm's "ongoing commitment to profitable growth and structural improvement in returns is amply demonstrated in its development update".

"It is selling its Americas Distribution business for 16 times ebitda (earnings before interest, taxation, depreciation and amortisation) and investing in a high-return European Heavyside business at seven times. The transaction leaves the company with significant firepower to pursue further returns-enhancing activities. This, combined with a reiteration of its positive outlook for full-year profits, highlights compelling value in the current share price," the analysts said.

In China, where the country has flagged its plans for a major infrastructure project called the Belt and Road initiative, Manifold says CRH is well-placed to benefit from investments in deepwater ports and roads.

"Building roads is something that is bread and butter to the likes of CRH. We have been talking to the Chinese government for almost a decade about increasing their investment. They're the biggest users of cars in the world, they've got a pretty poor network of roads across their country... that's something we'll be able to capitalise on.

"I have to say, there's a lot of talk and we haven't seen much being delivered... but if it does come through, we're well positioned."

The main headache for the company at the moment is out in the Philippines. Ebitda in its Asian businesses was down 41pc in the half year with revenue down 41pc. Manifold said a change in government had led to a pause on infrastructure spending, while a flood of imported cement had caused strong price competition.

Imported cement has now been banned as the country seeks to maintain security of supply, and Manifold says that in a couple of years, the company anticipates the situation will have recovered. He maintains the investment thesis remains sound and that the country has long-term construction needs. Input cost inflation has also been posing a headache in Europe and the US, but Manifold says he has been happy with how the business has managed to recover that through pricing.

Manifold has been in the role since early 2014, and since then, the company has completed some massive transactions. 2015 was a busy year, with the company agreeing deals for a series of assets that came to market on foot of regulatory conditions attached to the Lafarge-Holcim mega-merger (€6.5bn spend), and also for US-based CR Laurence (€1.1bn at today's euro-dollar rates).

Investors have backed Manifold's deal-making to date. The share was trading around €20 at the beginning of 2015 and is now at around €30. The company's net debt to ebitda ratio will be a very healthy 1.3 post the deals announced this week.

But with so much of CRH's growth dependent on acquisition, the pressure is on Manifold to get it right when it comes to deals. He is keen to paint himself and the rest of the company's management team as prudent pursemasters.

"We're careful, disciplined acquirers of businesses. We don't lose the run of ourselves or let anything go to our head.

"I think the key success that we have all learned through our experience and decades of experience here in CRH is to be patient and to be disciplined.

"That's the way you play this game and if you look back at the history of the business, you never find serious overpayment for businesses.

"Our pipeline is strong, we just have to be selective and careful to ensure that any business we buy is at a fair multiple and integrates well."

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