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Martin Marietta, Vulcan Fighting for Survival in Aggregate Market

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Vulcan says Martin Marietta Materials' takeover offer undervalues its reserves. Some analysts say a combined company with a larger market share would provide pricing leverage.
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Martin Marietta Materials Inc.'s hostile takeover of rival aggregate supplier Vulcan Materials Co. has been dealt a setback.

On May 4, Delaware Chancery Court Judge Leo E. Strine Jr. took the unusual step of imposing a four-month ban on Martin Marietta's bid efforts, saying the Raleigh, N.C.-based firm "improperly disclosed confidential information."

Martin Marietta disagrees that it acted improperly and plans to appeal the decision, which was crucial in the company's proxy contest to take four of Vulcan's 10 board seats. The positions come up for election at the Birmingham, Ala.-based firm's June 1 annual shareholders meeting; yet, the court-ordered ban expires on Sept. 14. Martin Marietta consequently withdrew its board nominees on May 14, although it still plans to fight.

"We presently intend to continue our efforts to combine with Vulcan, including pursuing our exchange offer, as soon as we are permitted to do so," Martin Marietta said in a statement.

The unsolicited $5.1 billion stock-swap offer, made on Dec. 12, came 18 months after behind-the-scenes merger talks with Vulcan disintegrated. The proposal equals $36.69 a share, representing an 18% premium based on Vulcan's stock price. Although Vulcan would have a 58% ownership in the combined company as well as a management leadership role, it "did not share Martin Marietta's views as to the level of synergies," Martin-Marietta said in a Dec. 12 Securities Exchange Commission filing.

"Vulcan's peak earnings before interest, taxes, depreciation and amortization of $1.3 billion is more than double Martin Marietta's historical high," Vulcan said in a January shareholder presentation. "The premium implied by the offer is significantly lower than recent industry transactions, and significantly undervalues Vulcan's aggregates reserves."

Vulcan further argues that its cash gross profit per ton of aggregates is 28% higher than Martin Marietta's, and its reserves concentrated in more high-growth markets. The company additionally worries that Justice Dept. "antitrust approval would likely require divestitures" of key assets that would "erode" its value.

Accordingly, Vulcan sued in U.S. District Court in Birmingham on Dec. 12 to block the acquisition attempt, while Martin-Marietta counter-sued the same day in Delaware and Trenton, N.J., to validate the offer.

Improved Pricing Leverage Foreseen

"This merger would improve pricing leverage," says Garik Shmois, senior research analyst with Longbow Research, Independence, Ohio. "That is one of the most attractive drivers."

The rivals are currently the largest U.S. suppliers of aggregate materials; a merger would give the new entity 28 billion tons of mineral reserves, while simultaneously saving $200 million to $250 million in costs, Martin Marietta says.

"While industry participants want the deal to go through, several worry that a merger is caught up in management ego versus value creation," says Kathyrn I. Thompson, director of research for Thompson Research Group, Nashville. "The ball is now in Martin Marietta's court."

An unsuccessful appeal could prompt Martin Marietta to improve its offer.

"Martin Marietta could potentially come back with a sweeter offer to try and win over Vulcan's board," says Brent Thielman, senior research analyst with D.A. Davidson & Co., Lake Oswego, Ore. "They could return next year for another run at it."

However, prolonged pursuit could prove costly. Martin Marietta is currently spending $20 million per quarter in legal fees in its merger pursuit.

"[They] could throw in the towel," says L. Todd Vencil, a senior research analyst with Stern Agee, Birmingham, Ala. "And, of course, either company could approach the other to re-start talks aimed at accomplishing a friendly deal."

As Judge Strine notes in his 138-page opinion, "The road to true love seldom runs smooth, even for companies that make paving materials."

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