Jan. 28 (Bloomberg) -- Martin Marietta Materials Inc. Chief Executive Officer Ward Nye embraces the expression “everything’s bigger in Texas.” That’s why he says he jumped at the chance to double sales there when cement maker Texas Industries Inc. decided to sell late last year.
Nye’s company will double the percentage of sales in the Lone Star state with the $2.7 billion purchase of Dallas-based Texas Industries, Nye said in a interview. Martin Marietta also picks up a California cement plant near Los Angeles that will give the company “options,” Nye said.
“Texas is a market that’s important to us and it’s been our No. 1 revenue market for several years,” Nye said. “The Texas economy has clearly performed better than most and we feel like it’s positioned to do even greater things in the years to come.”
Buying Texas Industries gives Martin Marietta an entry into the cement market as home construction bounces back, after U.S. housing starts rose 18 percent to 923,400 last year for the most since 2007. Martin Marietta produces crushed stone, gravel and sand, which are known as aggregates and are mixed with cement to produce concrete.
Texas Industries is the largest cement producer in Texas with two cement plants and No. 3 in California, with the plant near Los Angeles. In the U.S., Texas consumes the most cement and aggregates and California is second.
Nye said his company may consider selling the California cement assets, which are not “vertically integrated” or supported by aggregate and concrete production as Texas Industries’ Texas operations are. Other outcomes in California include operating the cement plant, building up aggregates and concrete or forming partnerships, Nye said.
“We have great options in California and those will be the things that we’ll be spending some time sorting out here over the next few months,” Nye said. “The barriers to entry in California are very, very high and that’s going to be a valuable asset any way you look at it.”
The transaction is the largest among 48 acquisitions of cement and aggregate companies in North America over the last five years, according to data compiled by Bloomberg. The average premium paid was 7.2 percent, the data show.
Each Texas Industries share will be exchanged for 0.7 Martin Marietta share, according to a statement today. That valued Texas Industries at $71.95 a share, based on yesterday’s closing prices, or an implied increase of more than 15 percent from Dec. 12, according to the statement, before Bloomberg reported that the company was exploring a sale.
“They bought themselves a major enhancement to their franchise in Texas and an option in California,” said Todd Vencil, an analyst with Sterne, Agee & Leach Inc., who has a buy rating on Martin Marietta and a neutral rating on Texas Industries. “They are well aware these deals don’t come around all the time.”
Martin Marietta rose 3.9 percent to $106.75 in New York. Texas Industries rose 2.9 percent to $73.60 after declining 4.7 percent yesterday.
With Texas Industries, Martin Marietta will have aggregate shipments of 143 million tons, surpassing Vulcan as the largest producer of sand, gravel and crushed rock. Martin Marietta’s sales from Texas, the U.S.’s largest consumer of cement and aggregates, will double to 34 percent with the merger, Nye said.
Martin Marietta said Texas Industries has 7.4 million tons of cement capacity. Texas Industries, has posted losses from continuing operations in four of the past five years.
Texas Industries said Jan. 8 it has announced cement price increases totaling $8 a ton in Texas and $8.5 a ton in California by April, citing improved construction. Over the next five years, annual cement demand will rise an average of 6 percent in Texas and 9 percent in California, Chief Operating Officer Jamie Rogers said on a conference call with analysts, citing data from the Portland Cement Association.
To meet higher demand in Texas, the company restarted an older kiln that it refurbished at a plant in the state, with 900,000 tons of capacity.
--Editors: Molly Schuetz, John Lear