UK cement industry can hold weight of RMC deal
NEWS ANALYSIS Fears that the ready-mix concrete firm's swoop on its supplier would destabilise the sector are overblown
Peter Young, group chief executive at RMC Group, insisted that his company's pounds 920m-odd swoop on Rugby Group, the country's third-largest cement producer, was founded on issues that extended far beyond Britain. "Please let's keep this in perspective. This is not a UK story," Mr Young said after 10 days of intense negotiations with Rugby executives and bankers.
"This acquisition is a major step in our strategy to consolidate our position as one of the leading heavy building-materials companies worldwide," he said.
At issue are the potential consequences flowing from the vertical integration of Britain's building-materials industry, which covers the production of cement, aggregates, including sand and gravel, and the manufacture of concrete and concrete products.
In a fast-consolidating sector, RMC's bold strike is of special interest as this is the first time in Britain that a leading supplier of ready- mixed concrete has teamed up with a leading supplier of cement, its costliest ingredient. In this country at least, RMC has extended its interests significantly, buying out one of its major raw-material suppliers.
RMC, which has operations in more than two dozen countries, is already the country's number-one supplier of concrete, claiming about a third of the business, according to figures supplied by Deutsche Bank. It takes the third slot in aggregates, with about 10 per cent of national sales, behind Tarmac, which was bought last week by Anglo American, and Hanson\ARC in third place. In snapping up Rugby, assuming that a spoiler bid is not launched in the coming days, RMC picks up the country's third-largest cement producer to complement its already strong position. RMC also owns a 50 per cent share in UK cement importer, Seament.
"It is an impressive line-up," one senior industry source said. "The question is whether anyone is going to raise a flag over the deal. I suspect that someone will just out of principle, but the UK competition authorities should not be too alarmed."
At first glance, the deal may raise the fear of an enlarged and more powerful RMC knitting together its string of British assets to drive down costs, squeezing competitors and, possibly, exerting undue influence across the market as a whole.
RMC says, however, that the proposed deal is almost certain to pass unscathed by British competition officials, partly because existing customer relationships will stand. Rugby cement factories will go on trading under the Rugby name, and go on supplying both RMC concrete works and those run by Tarmac and Pioneer, its closest competitors.
Similarly, RMC will continue to source its cement both from its Rugby operations and from those run by Blue Circle Industries and Castle, the other lead cement-making players. RMC says there will be some cost savings from unified purchase agreements, especially in fuel, and some redundancies, which will help to boost the bottom line from 2001.
"We have taken experts' opinions on this and believe we do not have a competition problem," Mr Young said. "People have overdone the vertical integration issue in the UK. Because of location [of cement producing- facilities] you can't just change contracts just like that... The Rugby name will stand, it's a good brand. We don't propose to make substantial changes."
Analysts say that the geography of plant location and the nature of cement as a bulky commodity which commands high transport costs will work against any immediate major shake-up of British cement-supply arrangements. The factors should also allay competition authorities' concerns, they say.
"It is not an attempt to dominate in the UK," says Johnson Imode, an analyst at Charles Stanley & Co. "It's an attempt to expand operations globally. It's hard to fault."
Rick Haytornthwaite, group chief executive at Blue Circle Industries, which controls almost half of Britain's cement market, agrees. "We've looked at vertical integration and dismissed it. It makes no sense for RMC to re-work supply arrangements... If they need us as a supplier, we need them as a customer," he says.
To be fair to RMC's Mr Young, the transaction is about more than the implications for the UK market. Rugby, which has off-loaded a string of non-core assets in recent months to focus on its building-material operations, has extensive cement interests in Australia and Poland. These could be added to RMC's existing cement operations which span California, Latvia, Germany, Croatia and Poland. In all, a combined RMC Rugby company would have about 20 million tonnes of annual cement capacity, compared with Holderbank, the global leader, which has about 85 million tonnes.
The acquisition will help to balance RMC's income streams more evenly between product lines, and spread its presence more uniformly across the globe. Before the deal, RMC's income was skewed towards aggregates (25 per cent) and concrete (33 per cent). After it, cement, concrete and aggregates will each account for about a third of operating profits.
For now, the fate of the deal rests with Rugby shareholders and, possibly, competition authorities. After yesterday's announcement, RMC waded into the UK stock market, bringing its holding in Rugby to 19.9 per cent, including shareholdings already pledged to back its offer.
Bob Lambourne, RMC finance director, said further Rugby shares could be bought after the go-ahead from Australian authorities, whose regulations cap RMC's holdings at this stage.
To cover the deal, the company has lined up a new pounds 2bn loan facility with Warburg Dillon Read, alongside pounds 350m in existing financing. Although the arrangements leave about pounds 500m for further deals, the priority will be to drag down the post-transaction gearing, which stands above 90 per cent, RMC says.
"They've said that UK supply arrangements will stand. There may be other deals in the sector, but this is not yet the end of the world," one analyst said.
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