Tarmac bid slippage - £3bn to £1.8bn?

Potential bidders for Tarmac are still thought to be knocking at the door, with Lafarge still viewed as front-runner, but with the offers falling well short of the anticipated £3bn price, the sale process seems to have been put on hold – but only for two to three months.

However Tarmac’s current owner Anglo American could find its hand forced at the drop of a hat as there is a massive round of consolidation surfacing amongst the various global mining giants and should AA wish to be a consolidator, as opposed to being swallowed up by a rival, then an instant pocketful of cash, thanks to a Tarmac sale, could become an urgent necessity overnight.

Short of that happening, though, the issue causing the stand-off is the size of the gap between what Tarmac thinks it is worth and what potential bidders are offering.

Tarmac can argue a case for a higher value as it significantly improved profitability in H1 (the first half of the current financial year).

But buyers want to offer less.

Private equity groups are having difficulty raising debt because the banks they turn to are still struggling with the knock-on effects of the sub-prime fiasco in America.

In addition, Lafarge and Orascom, viewed as the leading pair of trade buyers, are themselves involved in a merger, Lafarge having bid £7bn for Orascom.

Cynthia Carroll, Anglo’s new chief executive, has taken the view that Tarmac is non-core.

Historically, take-out bids have been tabled a 8x or 9x multiple of profits (or more accurately EBITA which is one particular way of expressing profitability, the EBITDA letters being a shortened form of saying earnings before interest, depreciation and amortisation).

Things all changed in May last year when a staggering take-out bid for Hanson was launched at a multiple of 12x EBITDA.

One analyst said: “Anglo’s bankers probably saw that 12x multiple and told Carroll they were sure they could get a 10x multiple and Anglo’s board probably said that was good enough to trigger the ‘go’ button.

“Now, however, the picture is very different and Anglo has missed the top of the cycle.

“Lafarge came out in November and said it wasn’t interested in paying 5bn euros, a move intended to stop the rumours of an imminent offer but also indicating that it wouldn’t pay a silly price.

“So what about private equity? Well until the sub-prime issues surfaced, banks would lend them up to 6x EBITDA, but that’s subsequently dropped to 5x.

“That means private equity either has to put more equity into a deal or the purchase price needs to fall by 15%-20%. If neither happens, then deals won’t get done in this environment. That’s not to say it’s all over for Tarmac as this environment will only last for months, three at the most.”

With Tarmac showing an EBITDA figure of £300m last year, a 5x multiple would point to a bid with a debt-element of £1.5bn. After adding 20% equity (£300m) that would result in a “fair price in the current climate” figure of £1.8bn. Not exactly close to Tarmac’s anticipated £3bn.