M&A lifts construction

25 March 2008

Late february to late march was a volatile and unsettling period for the world's stock markets. The strong rally over the first two months of the year came to a sudden end in week 8, when a sharp dip on the Shanghai market reverberated around the world.

After such a good run of growth it was inevitable that the markets would turn, as investors looked to take profits. The question of course was whether February's dip was just a ‘correction', which would be followed by stabilisation and a rebound in prices, or the start of a prolonged decline.

With a few uncertainties still existing in the global economic outlook, principally the state of the US economy, that question is yet to be answered in full. However, the markets recovered some of their losses towards the end of March, pointing to a correction rather than an economic catastrophe.

Having briefly dipped below the 12000-point mark in early March, the Dow rallied strongly towards the end of the month. However, it still recorded a net loss of -2,38% between weeks 7 and 12. This was the steepest drop of the mainstream indexes, followed by the Nikkei 225 – -2,21% over the same period – CAC 40 (-2,13%), FTSE 100 (-1,90%) and DAX (-1,23%).

Interestingly, the construction sector weathered the storm better than the mainstream indexes. Although one would expect this cyclical sector to fall more steeply than the wider markets, the CET Index for the whole industry only lost a marginal -0,46% of its value over the five-week period.

Things were a little different among the individual sectors that make up the Index. Materials producers' shares saw the biggest losses with the CEM dropping -2,49%, although this wasn't significantly worse than the mainstream indicators. Equipment manufacturers held their own with a small rise of +0,13% in the CEE index, while the contracting sector saw a gain of +1,35%, taking the CEC Index to a new record high of 261,98 points.

Merger Rumours

The key driver for the contracting sector's growth was renewed speculation about potential large-scale mergers & acquisitions (M&A). The catalyst was ACS's acquisition of just over 25% of Hochtief in week 12. The Spanish group acquired the stake from institutional investor Custodia Holdings at € 72 per share. This of course drove up Hochtief's stock, which had been trading around € 67 for the previous week.

Although ACS was quick to issue a statement saying a limited partnership, with Hochtief as an independent company (rather than a full acquisition), was its intention, certain shares in the sector shot up, on speculation of a run of industry mergers.

Most noticeable was Eiffage, which saw its stock rocket with a +23,78% rise between weeks 7 and 12. Some see the leading takeover candidate as Sacyr Vallehermoso, which already owns almost a third of Eiffage's equity. However, relations between the two groups do not seem as amicable as they might be, with Sacyr regularly voicing its irritation at not being granted a seat on Eiffage's board, despite being its largest shareholder.

Other big gainers included Peab and Veidekke. In Veidekke's case, the rally seems to have come on the back of news of several large contract wins in Sweden, along with the purchase of a stake in a small asphalt producer in the Stockholm area.

Peab's gain on the other hand looks to be linked to its plans to spin-off its Peab Industri subsidiary, which produces ready-mixed concrete and asphalt among other materials, and also has an equipment rental division.

Amec

A final notable riser over the five-week period was Amec. Despite lacklustre results for last year, the company's new CEO Samir Brinkho seems to have won investors' confidence with the progress to date in selling non-core businesses. His comment that more than 40 parties have expressed an interest in buying Amec's € 1,6 billion per year construction business was well-received, and the disposal looks set to go ahead later this year.

These various gains were more than enough to counter-act the various losses in the sector which seemed to be heaviest among the Spanish contracting groups.

Equipment manufacturers' shares also bucked the trends in the wider market with a +0,13% gain to finish week 12 at 218,42 points. The strongest gains were among the Asian manufacturers, most notably Doosan, Hyndai and Kobe Steel, although both Terex and Volvo also performed well.

Like the contracting sector, there was some interesting M&A news among equipment manufacturers during the five weeks under review, with Volvo agreeing to buy Ingersoll Rand's road building equipment division. This seems to have been well-received by shareholders in both company's with Volvo's strong stock rise of +8,18% and Ingersoll Rand's more modest +2,31% improvement.

There were no real disasters on the downside, with the sharpest share price fall being Atlas Copco's -4,58% drop. However, small losses for some of the highly capitalised US groups, most notably Caterpillar and Deere, pinned-back growth in the sector.

In contrast to the equipment and contracting industries, materials producers had a more troubled time with the CEM Index dropping -2,49% between weeks 7 and 12. The only companies to see their stocks rise over the five week period were Hanson and Lafarge. Losses in the sector ranged from marginal for the likes of Heidelberg Cement, Saint-Gobain and Schneider Electric to severe for Kone, Schindler and Woseley.

Kone and Schindler may well be suffering due to the massive fines handed out to them and others by the European Commission at the end of February, following an investigation into alleged cartel activities. Wolsely on the other hand is seeing its profits suffer due to its exposure to the US residential construction market.

Currencies

March saw the Euro generally appreciate, most notably against the US Dollar, which was related to hints from the US Federal Reserve that further interest rate hikes are off the agenda. At € 1 = US$ 1,3359, the Dollar was edging back towards the all-time low of US$ 1,36 that it hit at the start of 2005.

In terms of European currencies, the Euro gained ground against the Scandinavian currencies during March, but slipped marginally against most of the central and eastern European ones.

Outlook

It remains to be seen if anything comes from the various merger and acquisition rumours that are currently swirling around the markets. It is possible there will be deals, done, but it should also be said that rumours themselves are useful if you hold a particular company's shares, and their price suddenly shoots up because of takeover speculation.

Having said that there have been a few deals this year and their size and frequency seems to be increasing. Such activity is one of the classic signs that the market may be peaking, which is a plausible scenario given that US economic growth seems to be slowing.

But there are still plenty of positives in the market, and it would be premature to say definitively that the stock markets have reached their peak.

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