Fitch Ratings maintains Martin Marietta Materials, Inc.'s (NYSE: MLM) ratings on Rating Watch Negative pending the result of the company's proposal for a business combination with Vulcan Materials Company (NYSE: VMC). MLM's ratings were placed on Watch Negative on Dec. 14, 2011 following the announcement of the proposed business combination.
MLM is proposing a stock-for-stock, tax free transaction, in which each outstanding share of VMC common stock would be exchanged for 0.50 shares of MLM common stock. This exchange ratio represents a premium for VMC shareholders of 15% and 18% to the average exchange ratio during the 10-day and 30-day periods, respectively, ending Dec. 9, 2011. Based on this exchange ratio, VMC shareholders will own approximately 58% of the combined company while MLM shareholders will own the remaining 42%.
MLM's board of directors has approved the proposal while VMC's board rejected MLM's unsolicited exchange offer. MLM has nominated four independent director candidates to serve on VMC's board at VMC's annual meeting to be held on June 1, 2012.
On May 4, 2012, the Delaware Chancery Court blocked MLM for four months from pursuing its proxy contest, making an exchange or tender offer, or otherwise taking steps to acquire control of VMC. In granting the injunction, the judge found that MLM had breached confidentiality agreements between the two companies. MLM announced that it will pursue an appeal of this ruling.
If MLM is successful in its appeal, the company expects that the candidates it has nominated will stand for election at the VMC annual meeting and MLM will continue to pursue its exchange offer for VMC shares. If MLM is not successful in the appeal, the company will be required to suspend its activities with respect to the proposed business combination with VMC for four months, including the election of the four nominees to the VMC board and its exchange offer.
MLM is also in discussions with the Department of Justice (DOJ) with respect to the DOJ's regulatory review of the proposed business combination. There is some overlap in certain regions served by MLM and VMC, and regulatory approvals will likely require asset divestitures in these geographies. The scope and identity of these divestitures remains an important element of the proposed business combination.
The proposed combination of MLM and VMC has good strategic rationale as the two companies have highly complementary businesses without significant overlap. The combined company will create the largest global aggregates producer with roughly 262 million tons of aggregates shipments annually. The combined company will also have a well-diversified asset base across growth markets in the United States.
While Fitch views the combination as strategically positive for MLM, which has an Issuer Default Rating (IDR) of 'BBB', the rating is likely to be downgraded by at least one notch given the large amount of debt to be assumed in the combination and the resulting increase in leverage. Fitch-calculated leverage as measured by debt to EBITDA will increase from 3.0 times (x) for the LTM period ending Dec. 31, 2011 to approximately 5.5x on a pro forma basis.
MLM management has identified roughly $200-250 million of cost synergies, derived from a combination of operating efficiencies and elimination of duplicate functions. While these efforts could significantly improve the combined company's profitability, leverage is expected to remain high 12-18 months following the closing of the transaction given the costs associated with these synergies and the projected timeframe on when these cost savings can be fully realized.
Fitch expects to resolve the Rating Watch Negative upon review of the combined companies' financial profile, financing plan, asset sales, priority uses of future cash and cash flow and targeted credit profile.
Fitch maintains the following ratings on Watch Negative:
--Senior unsecured debt rating 'BBB';
--Revolving bank credit facility 'BBB';
--Short-term IDR 'F3';
--Commercial Paper 'F3'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Rating Basic Building Materials Companies' (Sept. 21, 2010);
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Basic Building Materials Companies Sector Credit Factors Compendium
Corporate Rating Methodology
Short-Term Rating Criteria for Non-Financial Corporates