Cemex Continues Debt Reduction Strategy With Unit Listing
BMI View : Cemex 's latest step in its debt reduction plan is to list a minority stake in its Lat A m unit on the Colombian stock exchange. We anticipate strong interest given the unit's exposure to growing construction markets in Central and Southern America . Consequently, the offering should be a positive step in the company's ongoing recovery.
Debt woes have plagued Cemex ever since it made a poorly timed, debt - fuelled US$16bn acquisition of Australian peer Rinker . The acquisition, just pri or to the 2008 US financial crisis, saw the company take on huge debt as revenues plummeted, sending it into a debt crisis.
However, Cemex appears to be firmly in recovery mode, a trend that has been in play for some time, but was highlighted by the refinancing agreement for US$7bn in loans, which included extending the maturities on these loans from 2014 to 2017 ( see our online service, September 14, 'Cemex Refinancing Deal Provides Further Relief'). This was notable on the company's share price, which has broken above long-term resistance at MXN10.
|On The Road To Recovery|
|Cemex Share Price, MXN|
However, pressures remain, and in order to address the ongoing high debt load, Cemex has outlined a four-pronged strategy:
Selling minority stakes in operations in select countries
Offloading selected US assets
Offloading selected European assets
Offloading non-core assets at the discretion of Cemex
The planned listing of Cemex Latam Holdings on the Colombian Stock Exchange is the implementation of the first point of the strategy. The listing has been in the pipeline for some months, with reports now emerging that the offering could take place in mid-November, depending on the status of the market. Cemex will offer 24%, or 126.6mn common shares, in Cemex Latam Holdings with a price range of COP11,000-13,500 per share. Of the shares, 110mn will be offered to investors in Colombia. It is estimated that the company could raise up to US$950mn according to the FT, citing people familiar with the deal. The funds would be used directly to lower Cemex's overall debt burden.
The LatAm unit is primarily exposed to Colombia, with 55% of the unit's sales within that country. This is likely to be the guiding reason behind the decision to list on the Colombian Stock Exchange. However, the decision was most likely reinforced by the fact that Colombia's financial and capital markets are substantially more business-friendly than its other options in the region - namely Brazil, and more liquid than those in Central America. Not to mention that Colombia's stock market has performed notably better than Brazil's over the past year (January 1- October 23), with the IGBC up 16.6% compared with the Bovespa's 0.5% decline.
|Standing Out From Weaker Markets|
|Sales Volume, January- September, % chg 2012 Vs 2011|
The unit has exposure to some of Cemex's best-performing markets, and those with strong potential. The Central, South America and Caribbean unit was one of only two to post growth in both gray cement and ready mix in Q3 2012 (compared with Q3 2011). Indeed, European weakness continues to weigh heavily on the company's revenues.
However, listing Cemex Latam separately allows investors to avoid having to weigh opportunities in Latin America against weakness in Europe (as with Cemex's group listing, or other global companies active in the region).
In Colombia, construction sector growth is anticipated to accelerate in line with, and in support of, the booming resource industry. However, we would also highlight Cemex Latam's exposure to a fragmented but growing Central America region, including Costa Rica, Nicaragua and Panama - the three markets we believe have the strongest potential in the region. Combined, these markets have an infrastructure project pipeline close to US$30bn indicating significant cement demand. However, we also highlight the difficulty of accessing these markets for investors.
|Construction Industry Real Growth, % y-o-y, Selected Latin America Markets|