Summit Materials Inc. (SUM): Announces the acquisition of Argos USA at valuation below replacement costs, synergy execution will be key

Summit Materials announced an agreement to acquire Argos USA (US operations of Cementos Argos) for $3.2 bn, consisting of ~$1.2bn in cash (~40% of transaction value), and ~54.7mn shares of SUM stock (~60% of transaction value). According to SUM, Argos USA has installed cement clinker capacity of 6 mn tons and grinding capacity of 9.6 mn tons per annum, with nearly 80% of cement sales through vertically integrated ready mix operations. The transaction value implies $533 per ton of cement clinker capacity, compared to replacement costs of $600-700 across the industry, based on our fieldwork and comments from industry participants. The key investor debate would hinge on SUM’s ability to deliver margins on the acquired operations closer to industry standard margins.

The transaction value implies $533 per ton of cement capacity compared to replacement costs of $600-700 across the industry, based on our fieldwork and comments from industry participants. Argos USA sells 6.6 mn tons of cement (6 mn clinker and 600,000 imports) according to management. The industry average selling price is in the $150’s. Its footprint includes 4 integrated cement plants, ~140 ready-mix plants and 8 ports.

Calculated cement margins is 24% for Argos USA based on management disclosures on total sales, EBITDA, as well as disclosures around the ready mix business. SUM’s disclosures on cement synergies imply margins of approximately 30% post synergies. Execution here will be key, as industry margins are in the 35% range.

Calculated ready mix margins is 7% for Argos USA based on the management disclosures on total sales, EBITDA, volume, price, and % of EBITDA from ready mix. SUM’s synergy targets imply 10%+ margin, based on synergies targeted within the ready-mix business. SUM plans to implement its logistics expertise on the Argos USA assets.

According to SUM, the EV/EBITDA multiple for the transaction was 10x on Argos USA’s 2023E EBITDA, which compares to SUM’s 2023E EV/EBITDA of 10.5x (FactSet). According to SUM’s management, on an adjusted basis post synergies, the multiple is 8x, which they stated translates to proforma combined EBITDA of ~$1bn ($4bn revenue including synergies).