EQUITIES BUILDING MATERIALS: OUTPERFORM NOT RATED CIMPOR CIMENTOS PORTUGAL TARGET PRICE N/A Brazilian cement players expand overseas th Camargo Correa and Votorantim acquire the 7 largest European cement producer 26 JUNE 2012 On 20 June 2012 Votorantim and Camargo Correa (Brazil’s largest and third largest cement Rohit Bhatia producers, respectively) confirmed their acquisition of a further 40% of Cimpor’s shares. They now (+44) 203 430 8433 effectively control 95% of Cimpor. The EUR 5.4bn bid values Cimpor at 9.0x 2012e EBITDA – [email protected] slightly less than the average transaction multiple over the last decade (9.6x). The assets of Yassine Touahri Cimpor are to be split between the two Brazilian groups. (+44) 207 039 9523 [email protected] Brazilian consolidation and geographical expansion Paul Roger, CFA The deal allows Camargo Correa to establish itself as the second largest cement producer in Brazil (+44) 203 430 8415 [email protected] and takes the market share of the top 5 producers to 81% (vs. 75% pre-deal). This compares favourably versus other large emerging market consuming nations such as China, India and Russia. Consolidation could be positive for the industry in general. There is limited risk of the deal running into anti-trust concerns in Brazil, in our view. The transaction enables Camargo Correa to expand in Africa (the group already had a cement project in Angola). It also facilitates Votorantim’s geographical diversification by adding potential growth platforms in the Mediterranean Rim and Asia to its existing footprint (Latin America, US and Canada). New paradigm in international cement markets: a challenge and an opportunity Industry dynamics were mostly shaped by the European majors last cycle. Now, as evidenced by this sizeable deal, emerging market players are becoming more ambitious and starting to influence the landscape. They are playing an increasingly large part in sector M&A and capacity expansion. This new paradigm presents both a challenge and an opportunity for the sector. It means there are buyers for majors like Lafarge looking to divest assets. Established and rational cement producers such as Camargo Correa and Votorantim could also help improve returns in emerging markets via consolidation. On the other hand, these growing players pose a potential challenge to the existing industry order and some new entrants could also adopt disruptive strategies. Price (25 June 2012) EUR3.79 Performance* (%) 1w 1m 3m 12m Market cap (EURbn) 2.5 Absolute (31) (30)(23) (28) Free float (EURbn) 0.5 Rel. Building Mat. (31) (29) (11) (15) EV (EURbn) 4.2 Rel. MSCI Europe (31) (30) (17) (25) 3m avg volume (EURm) 10.4 Reuters / Bloomberg CPR.LS / CPR PL Country / Sub Sector Portugal / Heavy Building Materials * In listing currency, with dividend reinvested Financials 12/11 12/12e 12/13e 12/14e Valuation metrics* 12/11 12/12e12/13e 12/14e EPS, Adjusted (EUR) 0.29 0.29 0.34 0.38 P/E (x) 17.2 13.2 11.0 9.9 EPS, IBES (EUR) 0.30 0.35 0.39 0.46 Net yield (%) 3.3 4.3 5.1 5.7 Net dividend (EUR) 0.17 0.16 0.19 0.22 FCF yield (%) 8.9 9.4 10.0 10.8 EV/Sales (x) 2.3 1.8 1.7 1.5 Sales (EURm) 2,275 2,300 2,457 2,606 EV/EBITDA (x) 8.4 7.1 6.2 5.7 EBITA, Adj. (EURm) 373 348 396 428 EV/EBITA (x) 13.8 12.1 10.4 9.3 Net profit, Adj.(EURm) 198 193 232 258 EV/CE (x) 1.2 1.0 0.9 0.9 Please refer to important disclosures ROCE (%) 6.1 5.7 6.4 6.9 at the end of this report Net Debt/EBITDA, Adj. (x) 2.7 2.6 2.2 1.9 * Yearly average price for FY ended 12/11 Takeover of the 7th largest cement player in Europe Camargo Correa and Votorantim confirmed that together they had acquired a further 40% of Cimpor’s shares. They now effectively control c. 95% of the stock. What is Cimpor? Cimpor is the largest cement producer in Portugal and also has a significant presence in more than eleven other countries, many of which are emerging markets. Cimpor is the fifth largest cement player in Brazil with an estimated 8% market share. Cimpor has a capacity of 36.5mt. It is the 7th largest integrated cement producer headquartered in Europe, after Buzzi Unicem, CRH, Italcementi, HeidelbergCement, Holcim and Lafarge. In 2011 Cimpor posted sales of EUR2.2bn and EBITDA of EUR0.6bn. Figure 1: World rankings by cement capacity (including 100% of minority stakes) mt 300.0 250.0 200.0 150.0 100.0 50.0 0.0 China Italy Holcim - Holcim Russia Germany China Switzerland Thailand - India Heidelberg - CR Cement - CR Cement Eurocement - CRH - Ireland CRH - Conch - China CNBM - China - CNBM Jidong - China Siam Cement - Buzzi Unicem - Sinoma - China Cemex - Mexico Cemex Taiheiyo - Japan Lafarge - France Italcementi - Italy Italcementi - Taiwan Cement - Cimpor - Portugal Aditya Birla Group Votorantim - Brazil Source: Exane BNP Paribas estimates from company data Cimpor currently derives around 60% of its EBITDA from Brazil, Portugal and South Africa. Cimpor has some vertically integrated positions in concrete & aggregates, but still makes most of its revenues in cement. It is less vertically integrated than groups such as Lafarge, Holcim, Cemex and HeidelbergCement. The map below illustrates the breakdown of Cimpor’s sales in 2011. The charts thereafter provide Cimpor’s EBITDA breakdown and sales split by division. We show Cimpor’s market shares by country in the Appendix. 2 CIMPOR CIMENTOS PORTUGAL │ 26 June 2012 Figure 2: Cimpor - 2011 sales breakdown 15% 10% 7% 5% 3% 4% 7% 2% 27% > 15% 10% to 15% 5% 5 to 10% 6% < 5% (Sources : Exane BNP Paribas estimates) Source: Cimpor, Exane BNP Paribas estimates Figure 3: Cimpor – geographical EBITDA and divisional breakdown (2011) EBITDA breakdown by country Sales breakdown by division South Africa Others Portugal 10% 6% 15% Egypt RMC & 8% Precast 22% Morocco 7% Spain 6% Brazil Turkey 5% 33% Tunisia Cement 4% 72% Mozambique India 4% 1% Cape Verde China Other 1% 3% 3% Source: Exane BNP Paribas estimates Between 2006 and 2009 Cimpor increased capacity by 45% through an ambitious capex programme and acquisitions in China, Turkey, India and the Canary Islands. 3 CIMPOR CIMENTOS PORTUGAL │ 26 June 2012 Figure 4: Cimpor – cement capacity evolution since 2002 mt 40.0 35.0 30.0 25.0 20.0 15 . 0 10 . 0 5.0 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Portugal Brazil Egypt Spain Tunisia South Africa Morocco Mozambique China Turkey India Source: Cimpor, Exane BNP Paribas estimates In early 2010, Cimpor was the target of a failed takeover attempt by Companhia Siderurgica Nacional (CSN) – Brazil’s third largest steelmaker. CSN’s efforts were thwarted by Votorantim and Camargo Correa who between them acquired c. 54% of Cimpor’s shares (see note from 25 February 2010 titled “Cimpor ownership upheaval: what are the implications?”). Structure of the deal - Cimpor’s assets to be split between Camargo Correa and Votorantim Camargo Correa launched a new takeover bid for Cimpor on 30 March 2012. It offered EUR5.5 per share for the c. 67% of the shares that it did not already own. Caixa Geral de Depositos (CGD – 9.7% shareholder) and Banco Comercial Portugues (BCP – 10.1% shareholder) indicated their willingness to accept the offer. Manuel Fino (10% shareholder) eventually agreed to the deal in early June. Votorantim (holder of a 21.4% stake) was originally uninterested in a cash offer. In order to persuade Votorantim to tender its shares, Camargo Correa announced its intention to split Cimpor’s assets with Votorantim post the completion of the deal. Votorantim agreed to this proposal, with the two groups effectively bidding together for Cimpor. The split is intended to take place in a two stage transfer process. The deal will result in Votorantim taking control of Cimpor’s operations in China, Spain, India, Morocco, Tunisia, Turkey and Peru and 21% of Cimpor’s net debt. Votorantim will then transfer its 21.4% shareholding in Cimpor’s shares to Camargo Correa. The assets in Portugal, Egypt, Brazil, Mozambique and South Africa will come under Camargo Correa’s control, with the group also set to assume c.79% of the remaining net debt. On completion, Votorantim will control Cimpor’s Mediterranean Rim and Asian assets, whereas Camargo Correa takes ownership of Cimpor’s Brazilian and African operations. The map below illustrates the split of Cimpor’s assets between Votorantim and Camargo Correa. 4 CIMPOR CIMENTOS PORTUGAL │ 26 June 2012 Figure 5: Asset split post deal completion 7mt 3.2mt 6mt 6mt 1.8mt 1.3mt 4mt 1.2mt 6.6mt Votorantim Camargo Correa 0.9 mt 1.6mt (Sources : Exane BNP Paribas estimates) Source: Cimpor, CMVM Valuation – slightly below average transaction multiples The deal was completed at a FY12 EV/EBITDA of 9.0x on our numbers. This is slightly below the year-one forward average transaction multiples of deals over the past decade (9.6x). The chart below presents a sample of the major deals between 2000 and 2012 along with Camargo Correa’s proposed offer for Cimpor. Figure 6: Camargo Correa’s deal for Cimpor compared to previous M&A deals in the sector 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 2007 2006 2007 2006 2006 2004 2012 2006 2000 Agg. Ind. by Ind.