The Cemex-Rinker Takeover Continues

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Time for another look at the Cemex takeover bid for Rinker (ASX: RIN) due to comments in the US Federal Reserve’s statement overnight.  As you may have noticed, the Fed decided to keep US interest rates the same at 5.25%, making it six months since they have moved it.  In the statement  it said, “Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market.”

Apparently, the market was hopeful of a change in the Fed’s language that may indicate a move towards loosening monetary policy in the next few months.  However that doesn’t look likely to happen.  As the Associated Press reported, “Investors fear that an increase could cause problems if it comes as the economy — in particular the interest rate-dependent housing sector — is still slowing.”

Jack Caffrey, equities strategist at JP Morgan Private Bank told AP “They’re trying to talk tough in the hopes of not having to act tougher.”

Is that good news or bad news for Cemex?  Instinctively, one would suggest it is good news for them in their effort to keep the share price of Rinker lower.  Arguments by Rinker that the Cemex bid is undervalued will be less convincing if shareholders see a continued and sustainable downturn in US building activity.

If shareholders start to take the short-term view that Rinker revenues and profits are likely to fall then they may be more inclined to take the current price of around $18 a share rather than wait – perhaps in vain – for Cemex to increase their bid or for a competing bid to emerge.  The current price is over $1.50 above Cemex’s bid.

Reuters reported that “In response to Rinker’s formal recommendation to shareholders to reject the offer, Cemex said its offer was ‘full and fair’, but it did not rule out raising the bid,” it went on to say, “Medina [Cemex executive] said that Cemex was willing to walk away from the bid, but did not say much more.”

On the other hand, for those that would prefer to take the more bullish side of the argument, they could reasonably argue that perhaps the US housing market has hit, or is close to hitting rock bottom and that Cemex should pay-up for future earnings growth in lieu of getting Rinker at a ‘discount.’

Then there is the argument from those such as Terry McCrann, who in the News Limited press on 30th November said, “The guys at Cemex should remember why they are bidding now, opportunistically seizing a temporary downturn in both the Florida market and the Rinker share price.”  If it is a temporary downturn that is.  We can only assume that McCrann has utilised his crystal ball to be so confident that it is short term dip.

In fact, so convinced is McCrann that Rinker is a great deal for Cemex that he wrote, “That is to say, it is not just a good fit, nor even a perfect fit — and it is that — but something even more telling : it is a must fit.”  This is because “Set against Rinker continuing as an independent player in the high-growth US states of Florida, Arizona, and Nevada.  Or potentially worse — joining ‘somebody else.'”

It is always tempting to lay on the bravado when talking up the prospects of a foreign takeover of a domestic company.  It is difficult to see that Rinker is a “must fit” for Cemex, so we shouldn’t be too surprised if the Mexicans string this one out to the end of January meanwhile lining up other acquisitions elsewhere.  Then, the board need to deliver on their statements.

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.
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  1. you may wish to read this:

    —–Original Message—–
    From: David Whittaker [mailto:dwhittaker@sceq.com.au]
    Sent: Wednesday, 20 December 2006
    To: David Whittaker
    Subject: FYI: DW’s Top 5 picks for 2007

    1. Lend Lease (BUY)

    It’s been a stellar rally, driven by a series of major project announcements amid speculation on some major UK project wins (Olympic village and Elephant & Castle). The company continues to establish new growth platforms in residential, commercial and infrastructure. LLC delivers real estate assets to retail, institutional and government owners, in many cases utilising its own project management operations. Funding for the assets is supported by the asset management business. In 2007, we expect strong earnings results and further project wins to support share price performance Our $20.00 target has upside from major projects like the Olympic Village, if secured. With geographic and sectoral diversity, the company is expected to return to a more dependable earnings trajectory, supporting a rerating toward multiples enjoyed by other growth stocks like WDC. Businesses like Crosby; Actus; Delfin and Retail are all under appreciated by the broader market, suggesting that the stock offers plenty of rerating potential. We expect earnings to beat estimates in all these businesses in the next two years, propelling EPS at well above the 10% per annum long term target. Twelve month target $20.00. Two year target $25.00.

    2. Wesfarmers (BUY)

    This great company is exceptionally well positioned for growth. The OMP and Linde acquisitions and another $850m of capex this year will support FY08 and FY09 earnings. But most importantly, Bunnings is once again humming. Same store sales growth of 13% is the first quarter is nothing short of spectacular yet it has been glossed over by the market. Bunnings is THE GROWTH ENGINE. The business is almost 50% of the company’s valuation, it is a strong cash generator and it self funds an enviable growth rate. Adding 14 big boxes a year forever is a challenge but this, combined with new formats like Houseworks and the continued revamp of the existing 200 plus store network, offers double digit top line growth. With housing no longer a headwind, and the refurbishment program kicking in, Bunnings is expected to deliver sensational sales numbers in the next 12-18 months. The mood of WES management has shifted because Bunnings is cooking. One year target $40.00; two year target $45.00.

    3. Sims Group (BUY)

    Asian scrap prices remain strong, reaching US$300/t again recently. With US prices softer, the US-Asia spread has widened, virtually guaranteeing a strong March quarter. Consensus estimates seem about 15% too low for this year given these fundamentals. While most also are looking for declining earnings in FY08 and FY09, while we belie they can hold up as margins strengthen. The weaker copper price has recently been holding the stock back. And overly conservative copper price forecasts for next year appear the sole driver of negative EPS growth forecasts for FY08. Regardless of the copper price, this is a growth stock exceptionally well positioned to consolidate a still highly fragmented industry. The major shareholder is a wild card but we believe Nue may well be a buyer rather than seller of SGM in the long term. There is a chance Nue could take the company private. One year target $23.00. Two year target $28.00.

    4. Caltex (BUY)

    Caltex remains an outstanding long term story. Refined product shortages globally and in Australia will support margins at much higher levels in the medium term. The clean fuels standards are a major barrier to entry that will allow CTX to substantially exceed Singapore margins. A lift in refinery production from 10blpa to 12blpa will drive returns further in 2007. We recently have lifted our target to $25.00 and expect a strong start to 2007. Refining costs and marketing margins appear to be lower than expected suggesting 2007 will see strong growth return. One year target $25.00. Two year target $30.00.

    5. Rinker (BUY)

    Cemex should and will pay up because:

    (a) it has little other option of scale to satisfy its US and global strategic ambitions – Rinker is unique;

    (b) it can afford to pay more on EPS and long term hurdles given synergies;

    (c) it has the balance sheet and financial capacity to pay more given it’s global cement position;

    (d) it has paid much bigger premiums in the past; the average would suggest a price above $20.00;

    (e) US housing is stabilising.

    Target $21.00.

    All the best for 2007

    Dave

    David Whittaker

    Southern Cross Equities

    Ph: 61 (0) 2 8224 2886

    Mob: 0412 125 284

    Email: dwhittaker@sceq.com.au

    SOUTHERN CROSS EQUITIES LIMITED

    _____________________________________________________________________________

    TRADING PARTICIPANT ORGANISATION OF THE AUSTRALIAN STOCK EXCHANGE

    Southern Cross Equities Limited. ABN 87 071 935 441 AFSL No.: 247027

    Level 32, Aurora Place, 88 Phillip Street, Sydney, NSW 2000

    PO Box R234, Royal Exchange, NSW 1225

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