Martin Marietta And Vulcan Materials' Unfriendly Merger

 |  Includes: MLM, VMC
by: The Value Investor

Martin Marietta Materials (NYSE:MLM) announced the intention to merge their operations with Vulcan Materials (NYSE:VMC). The combined combination would become the global leader in construction aggregatives, with a combined market capitalization of $7.7 billion as of Friday's close.

The Deal

It is clear that Martin Marietta is leading this merger attempt. A year and a half ago, talks between both parties started, which recently collapsed. Still, Ward Nye, CEO of Martin Marietta, thinks the deal makes so much sense that he is preparing to make a hostile bid by directly making a proposal to Vulcan's shareholders. Martin Marietta is the smaller company, with sales of $1.8 billion last year, on which it earned $100 million. It pays a 2% dividend yield and trades at 2.4X book value.

Vulcan Materials is much bigger than Marietta, with $2.6 billion in sales. However, its efficiency is lacking, and it lost $100 million last year, resulting in a book value multiple of just 1.3 times. It is inferior compared to Martin Marietta in operational and financial efficiency, and carries much more leverage. On the basis of these numbers, a 58% share for Vulcan shareholders in the new entity seems rather generous.

The Synergies

The rationale behind any merger is that of greater synergies. Ward Nye, CEO of Martin Marietta, estimates annual synergies in the range of $200-$250 million. Today's market capitalization of the proposed combined entity is up some $900 million, reflecting the synergies. Vulcan's shares are up 17%, Martin Marietta just 3%. A lof of the synergies are already priced in to Vulcan's shares now.

Merger Arbitrage

For those making a quick buck, you are too late. Vulcan is trading at $39 right now; the half share under Nye's proposal in Martin Marietta is only worth $38. While opportunistic traders are pushing Vulcan's shares up 3% over the offer, it seems a fair deal for them. Traders are betting on the board of Vulcan to get a better deal or convince Vulcan's shareholders to not tender their shares.

Risky Game

Traders pushing up the stock are making a small bet by purchasing Vulcan's shares at 3% above the tender offer. While there is always a slight opportunity of getting a better deal, I would not advice playing this card. Martin Marietta is already making a generous offer, by offering 58% of the company to a slightly bigger but inferior company. Shareholders of Vulcan today get the opportunity not to tender their shares at a great price, but even get an additional 3% return as other opportunistic traders push the stock too far.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.