Rinker to Cemex – More Pesos Please

MELBOURNE AUSTRALIA 30 November 2006 - All of a sudden, everything that the market was thinking a couple of days ago has been turned on its head.  Everything is fine and dandy now.  We can forget the 1.5% drops in our market and in New York because now they have both rallied, shaking loose those pesky grizzly bears.

Yesterday's attention shifted to Rinker Group Ltd. (ASX: RIN), which has obviously been carefully considering the takeover bid from Mexico's Cemex.  If the takeover was successful, each shareholder would get around $16.50 per share, a $2 discount from yesterday's closing price, but around $2.50 higher than where the shares were priced prior to the bid.

As always it's a difficult choice for shareholders to make.  Do they take the money and run?  Or, do they have faith that the company can continue to grow revenues and profits over the next year or so that would see the share price eventually reach that level - and perhaps more - anyway.

Naturally a shareholder wants some sort of premium above the current share price as compensation for missing out on potential future gains.  The question becomes, how much is a reasonable premium?

Cemex will be just as keen to maximise its gain from the deal by making sure that it does not overpay for the asset.  Each cent that it raises its bid by means an extra amount which the company has to earn in order for Cemex to maintain the return it was after.  Or, it has to lower its expectations for the deal.  In that instance Cemex may decide that it just isn't worth it and walk away.

Such a decision would likely see the share price slump back to pre-takeover bid levels unless another serious bidder emerges.  Even then there would be no guarantee that they would even match Cemex's bid let alone increase it.

Robert Hook at fund manager SG Hiscock & Co told Reuters "They [Cemex] have a reputation of bidding and then not going higher, but a lot of those businesses were smaller.  So it is very hard to say whether they will push it higher.  A lot will depend on their talks with big institutions."

While Hans Kunnen at Colonial First State told Bloomberg News, "Industrial stocks like Rinker were once the market's laggards, but they're now starting to perform again largely thanks to takeovers."

In a statement, Rinker directors said "Shareholders should not surrender their stake in a company that is generating excellent returns now and has excellent prospects.  This bid is opportunistic and far too low."

Rinker gave twelve reasons outlining why they believe the bid should be rejected.  They included: "Rinker has a unique combination of assets that cannot be replicated.  These have resulted in leading market positions in the fastest growing states of the US, and in Australia… Rinker has an excellent track record of superior financial performance.  This includes compound earnings per share growth of 47% since listing as a separate entity in 2003."

And then slightly misleadingly, "The average Rinker share price is $1.80 per Rinker share above Cemex's offer price, adjusted for the interim dividend."

Two questions now remain.  First, whether Cemex will take the bait and boost it's bid, or whether it will call Rinker's bluff and walk away.  Secondly, whether the board can live up to the new expectations it has created for itself and the company.  They may, or may not, have made a rod for their own back.

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