- Potential €1bn acquisition
- Enlarged group has proforma cash profit of £211mn
- Rated on six times cash profit to enterprise valuation
SigmaRoc (SRC:50p), a group pursuing a buy-and-build strategy in the heavy building materials sector, is acquiring certain non-core European lime businesses from larger rival CRH (CRH) in a €745mn (£645mn) transaction. CRH has also granted SigmaRoc options to acquire further businesses in the UK and Poland for €255mn (£220mn). They are not currently standalone entities, so will need to be carved out of existing CRH businesses.
To part fund all the acquisitions, SigmaRoc is raising £205mn (€230mn) in a placing of 421mn new shares at 47.5p and a REX Intermediaries offer of 10.5mn shares. The balance of the consideration will be financed by a €505mn drawdown from a new €750m debt facility priced at a margin of 2.75 per cent above Euribor, and €175mn of deferred consideration. It means that SigmaRoc current net debt of £183mn will rise to around £620mn on completion, or slightly less than three times proforma underlying cash profit of £211mn for the enlarged group. Following the placing, SigmaRoc will have a market capitalisation around £550mn.
The game-changing deals will create a group generating €1bn annual revenue from operations across 14 countries and one with mineral reserves of 2.7bn tonnes. One of the acquisitions is the second largest lime producer in Germany that serves almost the entire country and has a leading market position in the North and East regions of the country. Another is a Czech lime producer that has operated in the local market since 1872 and was previously acquired by CRH in August 2017. Management of that business is overseen by the German lime producer. In addition, SigmaRoc is acquiring the only lime producer in the Republic of Ireland.
SigmaRoc enters the big time
Given the size of the transaction, it is deemed a reverse takeover of SigmaRoc, and one that catapults the build-and-buy group into another league.
Reassuringly, the acquired businesses have a consistent track record and are highly profitable, delivering combined cash profit of €134mn on revenue of €579mn in 2022. SigmaRoc’s management believe that revenue growth opportunities (expansion into new geographic regions) and cost synergies (operational and site network improvements, and procurement savings) could deliver €30mn of additional cash profit by 2027. The €1bn consideration being paid equates to a multiple of 7.4 times cash profit, a rating in line with the group’s previous acquisitions.
Importantly, SigmaRoc’s management is targeting a 95 per cent cash conversion rate for the enlarged group, implying annual free cash flow of more than £100mn. This should enable the group to pay down borrowings and cut its leverage ratio (net debt to cash profit) by half a point a year to a target ratio below one times within four years.
Of course, there is execution risk with any acquisition. However, SigmaRoc’s well-regarded management team has proved adept at acquiring and improving asset-and-reserves-backed businesses, successfully delivering both organic and external growth. In the five-year trading period to 31 December 2022, the board have quadrupled earnings per share (EPS) to 8p. The acquisitions are expected to be earnings accretive in the first full-year under SigmaRoc’s ownership, too.
Assuming all the acquisitions complete, and factoring in the £435mn increase in net debt, the enlarged group’s enterprise valuation of £1.2bn equates to six times proforma cash profit. That’s a modest earnings multiple for a business that will have dominant market positions in all its key lime markets.
So, having last advised buying the Aim-traded shares, at 54p, at the interim results (‘Secure a 13% free cash flow yield’, 2 September 2023), I maintain that advice. Please note that the shares will be suspended until a new Aim Admission Document is published later this week. Buy.
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