Cemex to Rinker – No More Pesos for You

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MELBOURNE AUSTRALIA 5 November 2006 – The horseplay between Mexico’s Cemex and Rinker Ltd. (ASX: RIN) continues.  A statement from Cemex said that the company “continues to believe that its USD$13 offer is full and fair.”

Yet Rinker’s share price continues to trade significantly above this level.  At the close of trade yesterday, the share price had risen to $18.60, or the equivalent of USD$14.63 based on the prevailing exchange rate.

Cemex went on to say, “Rinker is asking shareholders to reject Cemex’s offer on a ‘trust me’ basis, without an indication as to how superior standalone value would be created.”

It certainly does continue to be a brave stance by the Rinker board, especially given the potential softness of the US housing market.  However, Rinker management say they are still positive on a turnaround in US housing, hence their preparedness to reject the Cemex bid.

Rinker shares were trading well above current levels earlier on this year prior to less than exciting news from the homebuilding market in Florida.  So it is perhaps not surprising that the Rinker board should try and artificially encourage the market to ramp the price back up in the forlorn hope of an increased bid.

Maybe we are being too harsh, but given the economic outlook and the current premium above the official bid, an upward revision to around USD$14.50 a share would probably make a decent compromise.

On the subject of company profits, we note the release of Australian company profit statistics by the Australian Bureau of Statistics.  A survey by Bloomberg News had predicted that gross operating profits would rise by 2.3%, however the ABS figures came in well below those economists estimates at only 0.6%.

Chief economist at the Commonwealth Bank, Michael Blythe said, “The broad thrust in this data shows as slowdown coming through.  Profits are still holding up, but they are starting to plateau.”

According to Bloomberg News “Rising costs have crimped some mining companies profits in the world’s largest exporter of iron ore and coal, even as commodity prices climbed to records.  Higher interest rates and wages may also have sapped earnings.”

And, as a sign that may not bode well for Rinker’s domestic building business, “Reports today showing falling home building approvals and job vacancies, may curb growth in the Asia-Pacific region’s fifth-largest economy.”

But as the report points out, much of the downside in earnings came from the mining sector.  Examples quoted by Bloomberg were, “Alumina Ltd. (ASX: AWC)… said rising costs and lower than expected prices will cut full year profit growth by as much as 10%.”

Or Iluka Resources (ASX: ILU), which said, “its profit in the six months to June 30 fell 59% from a year earlier after it mined lower grades of the mineral [zircon] and paid higher costs at its operations in Western Australia.”  It went on to say that “all operations were adversely affected by the higher energy, labour and mining services costs being experienced across the broader resources sector.”

The market definitely remains a rocky road.  The Christmas break may be just what everyone needs in order to take stock for the new year.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
Kris Sayce

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Comments

  1. Kris, do you understand how public stock markets work, particularly in the context of takeovers? I only ask because you’ve certainly gone out on a limb with your serious allegation that the Rinker board is “artificially” encouraging the market to ramp the price back up.

    Rinker has done nothing of the sort. If you have been following this company you would know that it has not changed the tune it has been whistling for the last 8 months. It is simply saying the company has a long term strategic value above the offer price – and a value that Cemex can easily afford to pay, while still making the deal EPS accretive. Rinker has been saying that it’s been oversold through short termism – the takeover defence clearly continues to focus on this fact. And clearly, the market agrees that Cemex will have to pay more.

    Reply

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