Sunday 20 October 2019

Appetite for building materials break-ups returns focus to CRH

CRH’s operation in Romania
CRH’s operation in Romania
Samantha McCaughren

Samantha McCaughren

News of the arrival of Cevian on the share register at CRH broke two months ago and perhaps unsurprisingly has gone quiet ever since. The Swedish activist shareholder is known for taking a long view on its investments and has yet to reveal its big plan to squeeze value out of CRH.

But recent developments in the US suggest that investor appetite for the break-up of large building materials groups could be forming.

It has emerged over the last fortnight that New York-based hedge fund Sachem Head Capital Management has built up a stake in CRH competitor Eagle Materials, a Texan producer of building materials. The activist investor has amassed a 9pc position in the firm, which is considerably smaller than CRH, with a market cap of less than $4bn (€3.6bn) compared with CRH's €23bn.

Cevian and Sachem are very different beasts. While the European fund has been coy about its demands, instead bringing a tone of constructive criticism to CRH, Sachem has a clear and radical plan for Eagle Materials.

Like Cevian, it is investing in a company which it believes is undervalued. It wants the company to consider divesting its frac sand business, which produces sand used by the oil and gas industry. It believes this division has dragged down Eagle Materials share price in recent years. It may also push for the sale of Eagle Materials' cement and wallboard units. Investors have reacted well to the break-up story - Eagle Materials's share price has enjoyed a sharp uplift on the back of Sachem's proposals.

Back in Europe, market insiders are of differing views as to whether or not CRH will come under the pressure to chip away blocks of its business.

One take on the opportunity which Cevian sees at CRH is all about a break-up story. CRH could opt for a partial listing of its North American business in New York.

CRH is also weighing up options for its European distribution business. There has also been speculation about the future of its Philippines cement business.

On the other hand, how much change will Cevian really need to make an acceptable return on its 3pc holding in CRH?

Buying into CRH is relatively safe bet for any large investor and if Cevian can help add a little more value, all the better.

It is believed to have built up its stake in the last few months of 2018, when CRH and other Irish stocks took a nosedive. CRH is already up 20pc this year.

The brasher style of US activist shareholders generally means they require significant change in order to make it worth their while. The jury is out as to just how active Cevian will need to be to be in order to get its return.

Firms hit by labour woes

The focus of much of the Brexit chatter in business circles unfortunately continues to centre on uncertainty.

One leading business figure told me last week that the various outcomes of Brexit could have wildly differing implications for his business, swinging from demand that his business would be unable to cope with, to logistical problems which could choke key parts of his company's operations.

Few contingency plans would have expected that so much would still be unknown in April 2019.

But there are other issues weighing on the minds of international employers, including the challenge of reliable workers - which is in its own way linked to both Brexit and the shift to the right in US politics.

The latest large Irish company to flag labour problems is IPL Plastics, formerly One51 and now listed in Canada.

Chief financial officer Pat Dalton gave an insight into the challenge of its workforce to analysts in a recent conference call. "During 2018, labour was a significant headwind. And it was headwind from a number of perspectives: firstly, in terms of the availability of labour; secondly, in terms of the cost inflation associated with payrolls generally," he said. "Its impact on our operating efficiencies, so in other words, whether labour shows up for the shift or not, and whether you suffer additional downtime because of that." The problems are in both Canada and North America it seems, compounded by high employment levels.

Dalton joins a number of Irish executives who have flagged concerns about the labour force both in the US and in the UK.

Last year Paul Coulson of packaging giant Ardagh Group told of how it had encountered problems with the workforce in the US. "It's difficult to get people who are drug-free, etcetera," he said. And Aryzta lost 800 workers in the US in a 2017 immigration crackdown at its Cloverhill facility, which it later sold off.

Greencore's Patrick Coveney has previously warned that the British food industry would not function without migrant workers. Hard-working, low-paid immigrant workers have played a vital role in several industries but this has been lost in the current political mood.

Several companies are seeing the effects first-hand. Expect to see more and more investment in automation as a result.

Sunday Indo Business

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