Eagle directors take page from TXI, Trinity, Grace, Heidelberg

Pointed exchanges between Eagle Materials management and a major shareholder culminated late last month with a proposed split of the Dallas producer’s Light and Heavy Materials businesses. The latter encompasses Fairborn Cement Co., Illinois Cement Co., Central Plains Cement Co., Mountain Cement Co., Nevada Cement Co., and Texas-Lehigh Cement; GGBF slag cement processor and supplier Skyway Cement; plus, integrated concrete and aggregates operations in Texas, Kansas City and northern California.

The results of a portfolio review spawned Eagle board approval for two independent, publicly traded corporations. The proposed separation is scheduled for completion during the first half of 2020, and will entail a tax-free spin-off of stock in the Heavy Materials and Light Materials entities to shareholders. As a U.S. heartland cement plant system with upward of 5 million tons’ annual capacity, management views the Heavy Materials business as poised for a) strong margins and significant cash flows; b) operation as a distinct pure-play, U.S.-only cement company with excellent future prospects as the largest domestically-owned producer; and, c) continued focus on low-cost production, participation in key U.S. geographies with favorable market dynamics, and profitable growth through strategic acquisitions and organic development of its asset network. The Light Materials business is set as a benchmark gypsum wallboard producer concentrated in Sun Belt states.

“The board and management team believe this separation will provide each of the businesses the financial flexibility to pursue its own growth strategies and operating priorities, and develop the appropriate capital structure and allocation priorities to generate long-term growth for all shareholders,” observed Eagle Chairman Mike Nicolais.

“We believe that by pursuing the[se] actions, the Eagle board is taking significant steps to unlock the company’s inherent value,” added Scott Ferguson, managing partner of New York-based investor Sachem Head and a catalyst in the portfolio review. “Given these developments and the substantial value creation potential, Sachem Head is withdrawing our director nominations and proposals, and we will fully support the board’s recommendations at Eagle’s 2019 meeting.”

The Eagle and Sachem Head exchanges had the makings of a 2009 back-and-forth between Texas Industries management and a Disney family-backed investment advisor. Both confrontations had Monday morning quarterbacking. Sachem Head questions centered on an Eagle portfolio split to maximize core business valuations, along with the potentially negative impact of management’s decision to pursue frac sand production and distribution alongside cement and wallboard profit centers.

The investor in Dallas-based Texas Industries challenged the timing of major California and Texas cement plant outlays as the effects of a deep recession clouded the near-term financial outlook. After sharp, public criticism of the TXI board, the investor prevailed in seating two director nominees. What they brought to the table is questionable in light of Martin Marietta Materials’ wildly successful 2014 acquisition of TXI at a valuation shareholders deemed fair.

Eagle’s Heavy Materials business could emerge as the largest U.S.-only cement producer traded on the New York Stock Exchange since Southdown Inc., which Cemex S.A.B. de C.V. acquired in 2000 as the first major step into markets immediately north of its Mexico base. The proposed Eagle split follows similar strategies involving cement and concrete businesses and Wall Street. HeidelbergCement AG sold the former Hanson Pipe & Precast and Brick entities in 2015 to an investor group, which in turn groomed the rebranded Forterra Inc. for an NYSE initial public offering. The following year, GCP Applied Technologies in Cambridge, Mass., was spun off from W.R. Grace & Co. and now trades on the Big Board—as does Arcosa Inc., the major Dallas aggregates operator separated from Trinity Industries in late 2018.