Ash Grove a sure bet for CRH model of “extracting the benefits of scale”

The ink had dried on September’s column, “Oldcastle-style capital reallocation,” by the time CRH Plc announced the boldest move in almost four decades centered on Oldcastle Inc., its North American business: A $3.5 billion acquisition of Kansas-based Ash Grove Cement Co., scheduled to close by year end.

“Oldcastle-style” assessed the planned sale of the CRH Americas Distribution segment—roofing, siding and insulation distributor Allied Building Materials—in a $2.6 billion deal with Beacon Roofing Supply. CRH Chief Executive Albert Manifold framed the move within a strategy of appropriately directing capital, concluding, “Proceeds will be reallocated to value creating acquisitions and investments.”

And how. Ash Grove appears a near-perfect target given CRH’s propensity to pony up for well-run, deeply rooted operators. It brings Oldcastle Materials integrated or stand-alone sites from the Great Plains to the Pacific Northwest: Eight cement and 52 ready mixed concrete plants, along with 20 limestone quarries and 25 sand & gravel operations. Oldcastle Architectural, whose dry mix and mortar brands include Sakrete and Amerimix, stands to gain nine bagging plants.

“CRH, as our largest customer, has enjoyed a close and highly productive relationship with Ash Grove for decades,” Ash Grove Chairman Charlie Sunderland said of the agreement to sell the business. “The Board of Directors believes CRH will be able to bring Ash Grove on the next phase of its development after 135 years in operation and over a century under the stewardship of the Sunderland family.”

The Ash Grove portfolio makes CRH a key player in U.S. portland cement production, and adds perhaps 10-25 percent to Oldcastle Materials/Architectural’s annual aggregates, ready mixed concrete and packaged mix or mortar volumes. It reinforces what was already the most important concrete producer in North America, on the strength of these company-reported—or Concrete Products-estimated—U.S. market positions for the Oldcastle Architectural, Materials and Products businesses:

The Ash Grove properties reported a 2016 pre-tax profit of $215 million on sales of $2.5 billion. They will offset the loss of Americas Distribution revenues and best roofing, siding and insulation margins. Based on integration and cost-savings potential, CRH capital reallocated to the Ash Grove deal will almost certainly see the Oldcastle Materials, Architectural and Products divisions maintain or extend what is already a proud rate of return on investment to shareholders: Aggregates, cement, concrete and asphalt sales in the U.S. and Canada represent upwards of 50 percent of CRH sales, and between 60-70 percent of the company’s operating profit.

“Ash Grove is an excellent addition to CRH’s portfolio of businesses across North America as we seek to deploy our capital into high-quality businesses that enhance our global asset base and provide opportunities to create shareholder value,” Manifold affirms.

If closed this year, the Ash Grove deal will bring CRH outlays over a 30-month window toward $13 billion. The bulk of that represents European Lafarge S.A. and Holcim Group assets, plus the entire Holcim (Canada) Inc. enterprise, acquired immediately after the merger creating LafargeHolcim Ltd. Now operating within CRH Americas as CRH Canada Group, the Holcim (Canada) package brought 3 million tons of cement capacity, a sizable portion integrated with concrete businesses on both sides of the U.S.-Canada border. With the addition of 8 million-plus tons of Ash Grove mill capacity, Oldcastle Materials is poised to apply to U.S. and Canadian cement markets growth models proven in aggregates, ready mixed and precast concrete, and asphalt production. In CRH strategy terms, it’s called “extracting the benefits of scale.”