Ash Grove Cement (ASHG) – Merger Arbitrage – 3%-6% Upside

Current Price – $515

Expectect Payout – $531-548

Upside – 3%-6%

Expiration Date – Q1 2018

Merger Announcement and merger document

This idea was shared by Eldar.

 

In Sep 2017 ASHG announced it will be acquired by CRH.

The crux of the news sets a range of $531-$548 (spread of 3.1%-6.4%). The deal should close any day.

While the final amount of the merger consideration will not be determined until following closing of the transaction due to fluctuation of certain components thereof through closing, the Company currently estimates that the final amount of merger consideration will be in the range of approximately $449 – $454 per share based on Ash Grove’s balance sheet as of June 30, 2017.

In addition, prior to closing of the transaction, the Company intends to pay dividends of excess cash currently anticipated to be in the range of approximately $617 – $706 million in the aggregate, or approximately $82 – $94 per share of outstanding Common Stock and Class B Common Stock, and $86 – $99 per share of outstanding Class D Common Stock.

ASHG shareholders have approved the transaction back in Oct 2017. Notably, a competing bid that was slightly higher, was not chosen by ASHG shareholders.

If government approval were a problem, we would have heard about it by now.

So to lose on this arbitrage, CRH would have to find a deal-breaker problem. As CRH has been intimately involved with ASHG since before the deal was announced (Sept2017), as a customer and bidder, the chance of such problem is near zero.

The risk reward approximates: 1% chance of losing ~50%, or 99% chance of making 3% to 6% any day now for the next 2 months.

I think the risk-reward is near the high end of the above because I think ASHG, based on cement pricing at all-time highs, will dividend close to maximum estimate of $94/share (ASHG has enjoyed favorable pricing on its products recently).

If deal collapses, the cash build at ASHG and competing bid should cause ASHG to trade above where it traded prior to CRH deal announcement, i.e. less than 50% fall likely.

From VIC write up in March 2016:

Cement prices have broken out. After being range bound in the high 70s/low 80s per short ton, Martin Marietta’s ASPs (they bought Texas Industries in 2014) reached $102.44/ST in Q4’15, up 10.5% YoY. They are guiding to 2016 price realizations of $110-112/ST, +8.4% YoY. As cement consumption inches higher, it gets closer to the supply wall that exists because of how difficult it is to build new capacity in this country. U.S. cement shipments increased 3.8% in 2015 to 92 million MT. U.S. production capacity remains at 100 million MT, virtually unchanged from my original writeup on ASHG back in 2012. ASHG controls approximately 8% of that capacity.

15 COMMENTS

  1. Steven Emer

    Potential antitrust issue? The deal, which is expected to close in late 2017 or early 2018, pending regulatory approval, will further strengthen CRH’s grip in North America where it is the biggest maker of concrete products and second largest supplier of aggregate materials for construction. CRH, the world’s third-largest building materials supplier, is adding the fifth largest cement manufacturer in the United States in family-owned Ash Grove which has extensive readymixed concrete, aggregates and logistics assets across the U.S. Midwest.

  2. Jim Rivest

    Ash Grove estimated they would be giving shareholders $449-$454 per share at closing based on their 6-30-17 balance sheet and what they projected for the following months until deal close. It looks like they will easily meet projections as 2H ’17 looked very good, but the $5/share variable is for working capital adjustments at close. They are a net user of cash in the 1st quarter of each year.

    They also planned on giving an additional and separate dividend for the excess cash and securities ($82-$94/share). I thought this dividend would be given much earlier, but it looks like it will be just a few weeks earlier than the merger consideration. The company said JPM with be sending out 2 checks.

    I asked the company what cash looked like on 12/31/17 and was told it should come in around $819M (audited financials coming out shortly) and $706M excess cash gets us to the high end on the dividend and “excess cash” is everything over $20M. There are still unknowns with this but reaching or even exceeding the higher end of the dividend target range ($94/share) seems quite doable.

    Ash Grove sold all their securities in Q4, so a disbursement here should happen before the deal closes. Under the new tax plan, net profits will be better that originally projected but the 21% tax rate was not retroactive in Q4 2017 when they sold their appreciated securities.

    The acquirer (CRH) still hopes to get the deal closed in 3-6 weeks (sometime in March), while Ash Grove is thinking it will take more like 6-8 weeks, so it may be April. The one big fear for investors is antitrust concerns because CRH post deal becomes one of the biggest producers (likely the biggest) in ready-mix concrete, aggregates, and asphalt in North America. Foreign companies now own the US concrete/cement space, as Ash Grove, while just the 5th largest cement producer in the US, was the biggest US-owned cement producer. So it is a concern, but it’s an Irish acquirer not Chinese and the one area where CRH was nowhere near the top was cement production. The FTC has a list of required sales in order to get their approval. CRH is in the process of selling various properties in Montana, Nebraska, and Kansas.

    CRH was Ash Grove’s biggest customer, so I think both knew from the beginning who would be the likely buyer. They started talking in April, so it made sense when they were getting serious to start selling some properties that would be of concern early on. CRH’s $2B+ US aggregate sale that closed in Jan this year was initiated in Aug last year. We have a very motivated buyer doing whatever it takes to get this done.

    I think it very unlikely that the FTC does not approve this sale. If that did happen though, I’m not nearly as sanguine as some others who believe it would likely be better in the long run because Ash Grove’s assets are so attractive. Also the tax plan makes this an even better deal than CRH originally projected.

    Having said that though, CRH was willing to pay up and many others weren’t. I also believe Summit threw themselves into the fray more to be disruptive than to actually win the prize. They are levered, 1/10 the size of CRH, and the CEO had an axe to grind because he was passed over and not given the reins at CRH.

    I hope this gets done and I believe the odds are overwhelming that it will.

  3. Eldar Brodski

    Jim,

    Has your view on ASHG changed since your post above? Did ASHG build or burn cash in Q1 2018?

    Seems like exceeding the higher end of the divdend target is likely given Q2 2018 should be at least as good as last year based on CRH’s last call.

  4. Jim Rivest

    Hi Eldar,

    In yesterday’s mail, a friend received Ash Grove’s report to shareholders for the quarter ended March 31, 2018. Its cover letter was dated May 30th, and it concluded with the following paragraph:

    “We continue to work diligently to complete the sale of Ash Grove to CRH plc. The process of obtaining required regulatory approval for closing has taken longer than originally envisioned, and while we cannot provide assurance, we are optimistic that we will be able to obtain such approval and close the transaction within the next few weeks.”

    Cash at March 31, 2018 went up a bit from year-end, $819M to $823M in normally a cash burning quarter. The Company’s cash balance generally increases significantly during the second quarter, (although rumors or lousy weather in April and May), but it still would be reasonable to suspect that the current cash balance is higher than $823M. I continue to think it will be on the high end of projected payout because this has taken longer than assumed.

    1. Eldar Brodski

      Thanks Jim

      On valueinvestorsclub.com, chewy, in his note of 4/25/18, stated that ASHG told him that they burned “a fair bit of cash” in Q1 and into Q2…the cash increase may be due to ASHG monetizing its assets, i.e. they sold marketable securities or reduced A/R and thus not signify an increase in shareholder value.

      Without comparing the balance sheets (12/31/17 vs 3/31/18), I cannot tell.

      Lastly, ASHG should generate $9-11/share in free cash flow this quarter based on CRH guidance that Americas Q2 would be at least as good as last year…we are 25 days away from booking that full amount, or, in other words, we should have 70% of that free cash flow by now. If they burned the avg of Q1 2017 and Q1 2016, that’s $6 million in burn, or ~$1/share, vs ~$7.00/share in free cash flow in Q2, i.e. $6/share in new value today, with another $3-4 in 25 days…so why do you believe in the high-end of the payout rather than the payout being exceeded, which you suggested in your Feb 26, 2018 post above, given the $823 million cash balance on 3/31/18?

  5. Eldar Brodski

    to perhaps state my question more clearly:

    If $706 million gets us to the high-end of the dividend they will pay ($94/share), and cash is likely to go up to ~$900 million by time deal closes, how do we not get a lot more than $94/share?

  6. Jim Rivest

    Hi Eldar,

    I own 5K shares of ASHG and am responsible for getting a few family members in this arb. I owned it prior to the takeout, but added a lot more shares early on because I thought it would go at the high end of the range. I did not think it would take nearly this long and I have repeatedly told family members for months it will be ‘just a few more weeks”. I did not want to compound my “over-promising” on the timing with “under-delivering” on the price, so I have been conservative.

    The longer this goes, the more we make. I have believed for some time now we wlll get $550+.

    I don’t know if you saw the last private post on VIC yesterday, but the poster took issue with Chewy’s info. Texas is doing very well and will more than compensate for some poorer Midwest weather. There are lots of moving parts here with interest rates and the Mercer index, so I’m sticking with $550+.

  7. Eldar Brodski

    Thanks Jim…we are on the same page

    I look forward to reading about your next ASHG.

  8. Jim Rivest

    Our long wait is coming to a conclusion and we deserved a few extra dollars.

    Ash Grove Cement Company Board of Directors Declares Special Dividend in Connection with Pending Acquisition by CRH plc
    6:32 pm ET June 18, 2018 (BusinessWire)

    Ash Grove Cement Company today announced that its board of directors has declared a special dividend of $100 per share of outstanding Common Stock and Class B Common Stock, and $105 per share of outstanding Class D Common Stock, contingent on the closing of the transaction under the previously reported Agreement and Plan of Merger with CRH plc, under which CRH plc will acquire Ash Grove.

    The special dividend will be payable to stockholders of record immediately prior to the effective time of the merger and will be paid following the effective time of the merger in conjunction with the payment of the merger consideration. Stockholders will receive information by mail regarding the process for surrendering stock certificates and receiving payment of the merger consideration and special dividend.

    Under the terms of the merger agreement, Ash Grove stockholders will be entitled to receive cash merger consideration comprised of a pro rata share (based on the number of shares of stock outstanding) of a $3.5 billion enterprise value, minus adjustments for certain non-controlling interests and debt-like items and certain other liabilities, and further adjusted to the extent net working capital and cash on hand at closing vary from certain thresholds. It is expected that approximately 98% of the merger consideration will be paid at the time of closing based on estimated information, and an additional amount, if any, will be paid following completion of a post-closing adjustment process intended to “true-up” the closing estimates to actual amounts as of the closing date. While the final amount of the merger consideration will not be determined until after closing of the transaction due to fluctuation of certain components thereof through closing, the Company currently estimates that the final amount of merger consideration will be in the range of approximately $456 – $466 per share based on Ash Grove’s balance sheet as of May 31, 2018.

    The transaction is expected to close within five business days, subject to satisfaction of customary conditions, though there can be no assurance regarding timing of the closing.

    1. Alex15

      Shares with the ticker ASHG are Class B or D shares? I am not sure how to separate both.

  9. Terence

    ASHG shares are common, just common stock, not class B or D.

    Received $447.23 on Friday, which is 98% of 456.36. $100 dividend somehow is not in yet.

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