Global Cement Giant Cemex Looks to Cut Costs, Debt After Rinker Buyout

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

In a move that will include an unspecified number of job cuts, the Mexico-based multinational cement giant Cemex SAB de CV, better known as Cemex (CX), said it will cut overall costs by 10%, an initiative made necessary by its June takeover of Australia's Rinker Group Ltd., Cemex said this week.

Cemex, the world's No. 3 cement producer - and the No. 1 player in the North American market - would not say how many of its 70,000 workers might be affected by the cost-reduction campaign, although a company spokesman who declined to provide his name told The Associated Press that it would be "much less" than the 10% cost-cutting target. Instead, Cemex will achieve its expense-reduction goals in numerous other areas, with the company noting that "savings opportunities imply more than just the withdrawal of personnel."

With its $15.3 billion buyout of Rinker, total Cemex debt soared to $19.2 billion as of Sept. 30. Even so, Cemex says that acquisition of the Australian company "strengthens our position throughout the value chain" and will allow for gains in savings and revenue.

Rinker had obtained about 80% of its income from the U.S. market, where the homebuilding sector has been badly stung by the subprime-mortgage crisis, causing defaults to soar and housing prices to plunge this year.

Early this month, the perceived risk of holding Rinker Group debt jumped after the new parent company halted asset sales that had a potential value of $4.25 billion, according to a report by Bloomberg News. Cemex was looking to sell assets to pare debt. Credit-default swaps on Rinker bonds increased 22 basis points - nearly a quarter of a percentage point - to 77.5 basis points, reported JPMorgan Chase & Co., (JPM).

A form of derivative debt instruments, credit-default swaps are formal financial contracts that rise as the perceptions of credit quality fall. On a derivative swap hedging $10 million in debt, every basis point [equal to 0.01 percentage points] equates to $1,000. The swaps have reached their highest level since Bloomberg began tracking the data in September 2003, the financial news service reported yesterday (Thursday).

Just last week, in a deal worth an estimated $250 million, Cemex sold some U.S. plants to Dublin-based CRH PLC (CRH). The divestiture was required by the U.S. Department of Justice Department as part of its approval of the Rinker acquisition.

However, when it announced the $250 million in facility sales to CRH, Cemex also announced it was calling off talks on a much-broader sale - one that would have generated debt-slashing proceeds of $4.5 billion. If it doesn't get those debt-cutting divestiture talks back on track, Cemex could well be looking at a debt-rating cut, which in turn would trigger a rating downgrade on Rinker's debt, Anita Yadav, head of credit and hybrid research with the Sydney office of UBS AG (UBS), told Bloomberg.

"In today's environment and with the negotiations with CRH in doubt, people are questioning the chance of them being able to find another buyer and reduce the debt in the next 12 months,'' Yadav told the news service. "The rating agencies may say Cemex hasn't sold what they were expecting, so they will downgrade the company a notch while it finds its feet."

Both Rinker and Cemex, based in Monterrey, Mexico, have debt ratings of "BBB," the second-lowest rating from Standard & Poor's Corp., that is still considered to be "investment grade."

Despite the heavy near-term news, Cemex has a very bright potential future heading forward. Back in October, Cemex said third-quarter sales rose 31% to $6.1 billion, with the newly acquired Rinker providing some of the fuel. However, since the buyout also drove up debt and financing costs, profits actually declined 7% to $780 million.

Largely due to Rinker's strong U.S. presence, the third-quarter U.S. sales for Cemex soared 57%, The Associated Press reported. However, Cemex noted that "building-materials dynamics in the U.S. continued to be driven by the ongoing downturn in the residential sector." Sales rose by 6% the company's home market in Mexico, by 16% in Spain and by 10% in the United Kingdom. Sales in the remainder of Europe were up 14% over the same period in 2006.

With operations in more than 50 countries, Cemex is one of the largest building-materials companies in the world. It has been increasing its global reach through expansion and acquisitions. Because cement is such a dense, heavy product, making it difficult and expensive to ship long distances, companies much locate operations inside any markets that they wish to serve.

[For a Money Morning Investment Research Report that details reasons to invest in Cemex - as well as two other potential plays on Mexico - please click here. The report is free of charge].

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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