Short Paper: CEMEX and the Rinker Acquisition

TB0491

Copyright © 2017 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise. This case was written by Professor Michael H. Moffett for the sole purpose of providing material for class discussion. It is not intended to illustrate either effective or ineffective handling of a managerial situation. Any reproduction, in any form, of the material in this case is prohibited unless permission is obtained from the copyright holder.

Michael H. Moffett

CEMEX and the Rinker Acquisition (B) On April 9, 2007, the board of The Rinker Group Ltd. (Australia) approved a revised offer of US$15.85 per share after CEMEX S.A.B. de C.V. (NYSE: CX)—CEMEX—raised its offer 22%.1 With the backing of management, CEMEX obtained the needed 90% of shareholders’ approval on July 10, 2007, to close the acquisition of Rinker. CEMEX funded the acquisition nearly exclusively with short-term debt, in line with its proven acquisition process. This time, however, the combined purchase price and debt financing would both prove a challenge to CEMEX for years to come.

The Rinker Deal In the weeks and months that followed, many analysts debated whether CEMEX had overpaid for Rinker. One investment bank that followed CEMEX closely, Santander, still supported the acquisition:2

Although CEMEX has had to increase its offer price for Rinker, we believe that the acquisition is still potentially accretive for CEMEX, and that the resulting valuation is still attractive. In fact, applying a conservative estimate for CEMEX’s synergies of US$130 million per year to our sensitivity model would imply a year-end target price of US$37.60 per ADR, representing a potential upside of 7.0% from current levels, plus a 2.0% expected dividend yield in 2007. However, we believe that there may be additional upside in terms of the potential synergies, once the due diligence is completed. CEMEX management stated that there are potential savings in areas such as: capex; working capital; and taxes; although they have not been able to quantify this potential as yet. Our buy rating for stock in CEMEX remains unaltered.

CEMEX believed the Rinker acquisition had a number of strong business benefits, arguing that the deal expanded its diversity and strength in the aggregates and ready-mix concrete components of the concrete value chain. It also increased CEMEX’s market share in several of the key growth markets in the U.S. marketplace, namely Florida and Arizona. Although not as important, the added business segments in Australia and China expanded CEMEX’s global reach. The combining of CEMEX and Rinker operations in the U.S. market would also offer significant cost synergies (CEMEX had expanded its estimate to more than US$400 million in potential cost synergies in 2008). As described in Exhibit 1, CEMEX defended the Rinker deal as meeting all of the company’s corporate objectives demanded of all acquisitions.

CEMEX was a seasoned professional when it came to financing acquisitions. The company had paid down its net debt (debt less cash) from US$10.4 billion to just US$5.1 billion in the two years leading up to the Rinker purchase. The acquisition would be financed entirely with debt—US$14.2 billion, and would also require CEMEX to assume US$1.3 billion of Rinker’s existing debt obligations. Lorenzo Zambrano pledged to reduce CEMEX’s total net debt to under 2.7 times its EBITDA within two years.

“The combination of CEMEX and Rinker will create value for shareholders as well as customers, particularly in growth regions in the United States,” said Lorenzo H. Zambrano, CEMEX CEO and chairman, in a statement. “We intend to regain our financial flexibility as soon as possible and return to our steady state capital structure within two years.

Lorenzo H. Zambrano, Chairman and CEO, CEMEX.

1 CEMEX agreed not to adjust (lower) the offer price as a result of the dividend paid by Rinker at the end of 2006 to all shareholders. Arguably, immediately following the payment of the dividend, Rinker’s enterprise value would theoretically fall by the amount of the dividend. 2 “CEMEX: CEMEX Increases Its Offer for Rinker by 22%,” Santander Investment, Mexico City, April 10, 2007, p. 1.

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The combined firms would, however, reduce competition in specific markets according to the U.S. Department of Justice (DOJ). As a result, the DOJ filed suit to stop the acquisition. The DOJ argued that the acquisition would lessen competition and create a monopoly in interstate trade and commerce in violation of Section 7 of the Clayton Act. The court found in favor of the U.S. Department of Justice on August 31, 2007, requiring CEMEX to divest a number of the acquired properties in the impacted Florida and Arizona markets. Despite shedding these selective units, the acquisition was completed.3

Despite the closing of the Rinker acquisition in the summer of 2007, the merits of the deal continued to be debated. Analysts focused on three dimensions: (1) had CEMEX overpaid; (2) the acquisition would significantly increase CEMEX’s exposure to the U.S. housing market, which generated 50% of Rinker’s revenues; and (3) CEMEX’s debt would rise significantly—again—which could lead to credit concerns.

CEMEX’s Acquisition Process CEMEX used the same acquisition process with Rinker as it had used so successfully time after time.

1. Acquire. Pursue the acquisition target, friendly or hostile, until the deal is done. 2. Finance. Fund the acquisition largely with debt, often short-term debt. 3. Integrate. Integrate and assimilate, capturing cost synergies as rapidly as possible. 4. Grow. Continue to grow core earnings and cash flow capability as measured by EBITDA. 5. Pay off. Use growing earnings to pay down debt quickly, refinancing the remainder in the form of

long-term debt.

In the case of Rinker, that meant that CEMEX took on US$14 billion in new debt in the third quarter of 2007. As illustrated in Exhibit 2, this increased CEMEX’s Debt/EBITDA ratio, a metric of indebtedness used by the company’s bankers to track the firm’s debt-carrying capacity.

At the time CEMEX first considered making an offer for Rinker, in mid-2006, it expected growth in the core earnings of its existing and acquired businesses. But even as it pursued the acquisition in the fall of 2006 and spring of 2007, expectations for the core business were regularly revised downwards. The continuing construction slump only worsened. In the summer of 2007, as the Rinker deal closed, CEMEX’s earnings continued to slide. The following spring of 2008 saw growing anxiousness for the business outlook:4

3 United States Department of Justice Antitrust Division v. CEMEX, S.A.B. de C.V. and Rinker Group Limited, United States District Court for the District of Columbia, Case No. 1:07-cv-00640, May 2, 2007, pp. 2-3. 4 “CEMEX: Adjusting Our Target Due to a Continued Difficult Environment—Downgrading to Hold,” Santander, Mexico City, March 27, 2008.

Exhibit 1. CEMEX’s Explanation of the Rinker Acquisition

We complement the organic growth of our business with strategic acquisitions and capital investments. As a leading industry consolidator, we take a disciplined approach to capital allocation. We evaluate potential acquisitions in light of three investment criteria:

1. The acquisition should provide a return on our investment that is well in excess of our weighted cost of capital. 2. The acquisition should allow us to maintain our financial strength and investment-grade credit quality. 3. Factors that we can influence, in particular the application of our management and turnaround expertise, should

principally drive the potential for increasing the acquisition’s value.

Our recent acquisition of Rinker meets all of these criteria and is consistent with our business strategy. First, the acquisition will provide a return on our investment that is well in excess of our cost of capital. It also is immediately accretive to our free cash flow. Second, the acquisition allows us to maintain our financial strength and investment-grade credit quality. The transaction enhances our earnings quality, lowers our weighted average cost of capital (WACC) from 7.9% to 6.8%, and will yield our target return on capital employed of 10% over the medium term. Third, the acquisition leverages our management expertise, integration skills, and global operations network.

Source: CEMEX Annual Report, 2007, p. 20.

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Experts in the U.S. cement industry forecast that the crisis in the U.S. housing market, which represents one-third of cement consumption in the country, will continue during 2008, and they do not see any signs of recovery until late 2009 or 2010.

Yet there was cause for optimism. The U.S. made up only 25% of CEMEX’s revenues, and the Mexican economy and other parts of the company’s portfolio still expected some growth throughout 2008. One example of this was The Wall Street Journal’s argument that the recent fall in CEMEX’s share price represented a buying opportunity:

It may be drab, heavy and hardly glamorous, lacking the cachet of other commodities—say, oil or copper. But cement is as much a beneficiary of booming worldwide growth, though the housing bust in the U.S. and a looming recession have made it easy to overlook its producers. Case in point: Shares of the world’s third-largest cement maker, Mexico’s CEMEX (ticker: CX), have lost one-third of their value since hitting a 52-week high of $41.36 last June on concern about an acquisition that broadened its exposure to the U.S. market. That presents a compelling investment opportunity in a solid, century-old company.5

Although CEMEX’s 2008 sales in the U.S. had started slowly, the company still expected to close 2008 with an EBITDA of US$5.6 billion in 2008, 22% higher than 2007’s US$4.6 billion.

September 2008 Financial Crisis What is now commonly called the Global Financial Crisis exploded in the United States in September 2008. On September 6, 2008, the two government-sponsored mortgage associations, Fannie Mae and Freddie Mac, were put into government conservatorship. On September 15, Lehman Brothers filed for Chapter 11 bankruptcy. The next day, September 16, the U.S. government seized control of American International Group (AIG), one of the world’s largest insurers. In the months that followed, businesses of all kinds plummeted. In December, arrangements were made for the U.S. government to take over General Motors (GM) to avoid its collapse.

5 “CEMEX Paves a Global Road to Solid Growth; For Well-Run Cement Maker CEMEX, Booming Worldwide Growth More Than Offsets the Potential Drag from a Looming U.S. Recession,” The Wall Street Journal, March 10, 2008.

Exhibit 2. Funding Rinker

Source: Constructed by author based on data provided by CEMEX S.A.B. de C.V. (ADR), RBC Capital Markets, October 4, 2011, p. 13.

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CEMEX’s sales began to plummet in the third quarter of 2008. Spain was down 26%, Mexico down 10%, the U.S. was estimated down more than 25%. Housing starts in the U.S. were now roughly one-fourth what they were two years previous. On October 14, CEMEX reported more bad news: a US$711 million loss on financial derivatives, including forwards, interest rate swaps, and cross-currency swaps. It seems that the company’s hedge portfolio had proven to be more speculation than hedging.6

The company was now experiencing trouble in the refinancing of its debt, an integral part of Zambrano’s proven acquisition and integration plan:7

He largely eschewed long-term financing from capital markets in favor of shorter-term bank loans. These he would refinance a year or two following a takeover after showing lenders how well the deal was working out. The assumption was that debt markets would always be open to a business as professionally run as CEMEX. Now CEMEX is staring at a mountain of $16.4 billion to almost $20 billion of debt, depending on the accounting principles used, at least twice the company’s stock market value. Facing weak housing sectors in its three core markets—the U.S., Spain, and Mexico—the company is hard put to generate enough cash soon to whittle that debt much. Its annual cash flow equals about 17% of its debt, below its historic average of 30%.

As sales and earnings declined at CEMEX and everywhere across most markets, banks began freezing up, not being willing to extend, roll over, or refinance debt. Banks stopped answering the phone, regardless of whether the caller was CEMEX, Yahoo, or WalMart. As one treasurer noted, They don’t want to say no to new financing, but they can’t say yes. By December 2008, more than three months into the financial crisis, CEMEX was in crisis mode.8

The twin curse of a housing collapse and credit crisis has ravaged CEMEX. In a cold market for borrowing, CEMEX has $5.5 billion of debt coming due in 2009. Efforts the firm made to hedge its currency exposure have backfired, as a flight to the safety of Treasury bills sent the dollar higher, costing CEMEX $711 million. Now, a company known for relentless expansion is selling assets, negotiating with creditors, and cutting its work force and spending.

As illustrated in Exhibit 3, housing starts continued to plummet—as did CEMEX’s fortunes—in the third and fourth quarters of 2008. One of the most immediate and drastic of the impacts of the financial crisis was the fall of the Mexican peso and the rise of the U.S. dollar. Given the multitude of currencies CEMEX operated in and the varying sources of its debt, earnings fell further. To add insult to injury, CEMEX’s long-term currency hedging program that had been constructed to protect the company against adverse exchange rate movements was proving to yield the opposite result—increased losses. In early December, the company announced that it was unwinding its hedging program, but at the cost of a US$711 million loss. As noted above, CEMEX was now facing repayment of US$5.5 billion in debt in 2009.

EBITDA Outlook CEMEX, and the company’s creditors, relied on the company’s core earnings—EBITDA—to generate the cash flows to service debt. Unfortunately, expectations over CEMEX’s future EBITDA were being consistently revised downwards. Exhibit 4 illustrates how those expectations had repetitively suffered downward revision.

At the time that CEMEX had initiated its hostile takeover of Rinker, in October 2006, its EBITDA was forecast to hit US$5.071 billion for 2007 (as shown on Jan 1, 2008). In the end, actual 2007 results were only US$4.590 billion. But it was actual EBITDA for 2008 that would pose the biggest problem. Although forecast to hit US$4.600 billion in August 2007 as the Rinker deal was closed, actual 2008 results were only US$3.565 billion (shown in Exhibit 4 on Jan 1, 2009) of US$3.565 billion. This was essentially the same as that for 2005, a full three years before the acquisition of Rinker. And recent forecasts, made in October 2008 amidst the financial crisis, were now expecting earnings to continue to fall. 6 The company suffered a series of derivative losses at this time related to attempts to time market movements in interest rates and exchange rates, to outguess the markets. This program was led by CEMEX’s CFO, a cousin of Zambrano, and another graduate of Stanford. 7 “Hard Times for Cement Man,” by Joel Millman, The Wall Street Journal, December 11, 2008. 8 Ibid.

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Credit Quality and Corporate Cash Flow The Rinker acquisition immediately altered CEMEX’s credit profile with its lenders and posed serious challenges to the company’s ability to service its debt obligations.

Exhibit 3. CEMEX and Housing Starts: 2000-2009

Source: “New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places,” U.S. Census Bureau, seasonally adjusted annual rate.

Exhibit 4. CEMEX’s Changing EBITDA—Outlook in July 2009

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Credit Quality CEMEX entered 2008 with an investment grade credit rating (S&P’s BBB status). But at BBB, the company could not suffer a downgrade without being classified as speculative grade. Corporate credit ratings are based on a variety of factors including industry, product or service characteristics (predominantly the ability to differentiate themselves from other competitors and gain pricing power), cyclicality of business, and debt levels. Unfortunately, CEMEX was in a highly cyclical industry (construction), was producing what many considered a commodity, and had recently taken on substantial debt.

One of the most widely used measures of a firm’s ability to service debt was the Net-Debt/EBITDA ratio.9 This ratio combined the total level of net-debt (outstanding interest-bearing debt less cash) as measured against the core earnings of the firm—EBITDA. As is the case with most financial ratios, there is no one correct value, although in this case, smaller is better. CEMEX officially considered a ratio of 2.5 steady state.

Prior to the Rinker acquisition, CEMEX had closed 2006 with low levels of debt and a relatively large cash balance, establishing a low Net-Debt/EBITDA ratio of 1.44 (all values in billions of U.S. dollars):

The key driver was clear—EBITDA. The greater the core earnings of the firm, and therefore the core cash flow generated, the greater the ability to carry and adequately service more debt. Banks used this same relationship as the basis for estimating the debt-carrying capacity of a firm, the amount of debt the business’s cash flows could support. This was found by reversing the calculation and solving for debt:

Debt capacity = EBITDA Multiplier x EBITDA

For CEMEX in 2006, with EBITDA of US$4.137 billion, and assuming a baseline EBITDA multiplier of 4.0, the company was deemed to have a debt-carrying capacity of US$16.5 billion.10 Since this was far above its 2006 net debt of US$5.961 billion, its credit rating remained BBB.

But with CEMEX’s acquisition of Rinker in 2007, things changed dramatically. As noted previously, CEMEX closed 2007 with an EBITDA of US$4.591 billion, better than 2006, but nothing close to what had been forecast when the company had initiated its hostile takeover of Rinker. With US$14 billion of new debt, the company closed 2007 with net debt of US$19.1 billion, above what the banks considered appropriate.

The financial crisis of 2008 sent the housing and construction sectors downward at an ever-increasing rate. CEMEX’s earnings plummeted, hindering its ability to pay down debt as planned. CEMEX’s current debt covenants required the company to keep the Net-Debt/EBITDA ratio below 2.5. Rinker pushed the ratio well over 2.5, but CEMEX was granted a temporary waiver of the covenant by its banks until August of 2008. But August came and went without significant improvement.

Zambrano, in response to the growing concerns of creditors, stockholders, and analysts, converted much of the short-term debt to long-term, and committed to achieving a Net-Debt/EBITDA ratio of 2.7 or lower by the middle of 2009.11 This added to the complexity of the company’s cash flow planning for 2009, as it would require the company to allocate more of its free cash flow (operating cash flow – capex) to debt repayment. Few believed that 2.7 was achievable.

9 A second commonly used ratio is the interest coverage ratio, used to determine a firm’s capability to pay interest expenses on outstanding debt (interest-bearing debt). The ratio is calculated by dividing a company’s earnings, either EBITDA or EBIT, by the company’s interest expenses for the same period. 10 Multipliers are highly time and industry-specific. For manufacturing firms in 2006 and 2007, an average EBITDA multiplier of 4.0 was deemed appropriate. CEMEX, however, was in the rapidly declining housing and construction sector. Many banks now wished to limit the multiplier to 2.5 or 3.0. 11 “CEMEX Announces Increased Synergies from Rinker Integration,” CEMEX Press Release, March 05, 2008.

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Now at the end of 2008, two of the three major credit rating agencies—Moody’s and Fitch—downgraded CEMEX to speculative grade, with S&P expected to soon follow. The lowest investment grade rating is Baa3 (Moody’s) and BBB- (S&P and Fitch). The next rating downward is speculative grade, Ba1 (Moody’s) and BB+ (S&P and Fitch).

Credit rating downgrades had two immediate impacts on corporate borrowers: (1) reduced capital availability to borrowers, as many lenders either reduced their loan offerings or eliminated them; and (2) increased cost in the form of higher interest rates, often accompanied with elimination of fixed rate offers. These forces were amplified when the downgrade was from investment grade to speculative grade.

Much of CEMEX’s existing debt had been floating rate debt, typically priced in U.S. dollars at six-month LIBOR plus a credit spread. The credit spread reflected CEMEX’s perceived credit risk and quality. If CEMEX was indeed downgraded, the spread could increase, but even with that, it might be only 50 basis points (one-half of one percent). As seen in Exhibit 5, one of the more fortunate characteristics of the current financial crisis was that the U.S. Federal Reserve had pumped so much money into the system, interest rates collapsed. Now, at end of year 2008, six-month LIBOR was trading at 2.2165%.

Cash Flow Planning As anyone facing growing debt obligations knows, the first and foremost priority is cash flow: will the organization have the cash flow to service the debt as scheduled? As 2008 came to a close, a review of CEMEX’s cash flows for the current year revealed indications of growing financial distress.

In 2008, the company had generated a small net income of US$167 million. Exhibit 6 illustrates the company’s cash flows for 2008. Unfortunately, the dominant sources of operating cash flow in 2008 were depreciation and a reduction in net working capital (receivables and inventories less payables). The company still managed a sizeable amount of reinvestment, US$1.747 billion in capital expenditure.12 It had also paid down US$1.040 billion in debt and distributed US$0.476 billion in dividends to its stockholders. It partially funded these actions by selling US$0.747 billion in assets and issuing US$0.461 billion in new shares. From end to end, the company’s cash balance improved to US$1.156 billion. But 2009 posed new cash flow challenges. 12 CEMEX separated capex into two categories: maintenance capex (“investments incurred with the purpose of ensuring the company’s operational continuity”); and expansion capex. Expansion investments were considered discretionary.

Exhibit 5. U.S. Dollar 6-Month LIBOR (percent per annum)

Source: Federal Reserve Bank of St. Louis.

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A Financial Plan for 2009 CEMEX was scheduled to repay US$5.5 billion in debt by the end of 2009, US$3 billion of which was due at the end of the calendar year in December. If all values in 2008 were repeated in 2009 (those values shown in Exhibit 6), but debt repayment was US$5.5 billion as scheduled for 2009, CEMEX was in serious trouble, as illustrated in Exhibit 7.

Elements and Alternatives CEMEX needed a financial plan for 2009 that would allow it to continue to operate and appease its creditors. This meant restructuring the cash flows shown in Exhibit 7 to survive the year—to end it with a positive cash balance. If that was not possible, it would have to determine what amount of debt repayment was not possible in 2009, and work diligently with its creditors to refinance that debt—restructure the obligations so that the amount of repayment due in 2009 was reduced, with the maturity of some part of the total obligation maturing in later years. A successful refinancing plan would be one that found a balance in allowing the company to continue to operate and to continue to service its debt obligations, simultaneously.

CEMEX’s first task was to review every cash flow element shown in Exhibits 6 and 7, from net income to dividends, to forecast their value and explore how they might be managed in 2009 to stay solvent.

Net Income. As illustrated previously, core earnings (EBITDA) had repetitively been revised downwards for the future. Even with drastic cuts in expenses, 2009 was not expected to be much better than 2008’s net income of US$166 million. Unfortunately, CEMEX was famously world-class in its lean execution, leaving little excess to be cut now in operating expenses.

Depreciation. Depreciation reflected scheduled deductions from previous year investments. Depreciation had been rising only gradually over time, so 2009 would not be much different. It had averaged US$1.2 billion over recent years, but had risen to US$1.5 billion in 2008.

Exhibit 6. CEMEX Cash Flows for 2008

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Changes in Net Working Capital (NWC). Net working capital was not a large component of CEMEX’s cash flows. The fall in sales in 2008 had contributed to a reduction in NWC, and therefore a net cash inflow to the firm, but it was not expected to contribute regularly unless sales continued to fall.

Capex. There would be no expansionary capex in 2009, although anyone with capital would find it a time of plentiful and attractive buying opportunities. Maintenance capital expenditures, however, were required to sustain the business. Internally, leadership at CEMEX estimated that the company could get by with investing between US$700 million and US$800 million per year for the next year or two.

Asset Sales. Divestment of assets was a common activity by most firms as part of their ongoing business activities. But the sale of assets to raise cash in times of cash shortages meant sacrificing part of the firm’s future to survive the present.

CEMEX had already divested a number of units. In August 2008, CEMEX agreed to sell its operations in Hungary and Austria to Austria’s Strabag (Europe’s largest firm) for US$480 million (€310 million). The transaction was still awaiting approval by EU authorities. In early December, CEMEX had agreed to sell its Canary Islands operations to Spain’s Cimpor Inversiones for US$226.8 million (€162 million). It was still waiting for final regulatory approvals to close the sale, and it was assumed that some portion of the proceeds would be withheld in escrow for adjustments over time.

In August 2008, the Venezuelan government had expropriated all of CEMEX’s operations in the country. CEMEX had not been alone, as both Holcim and Lafarge, two of its largest global competitors, had also suffered the same fate. But as opposed to CEMEX, they had already agreed upon a settlement price with the Venezuelan government. CEMEX had argued with Venezuela that its operations were worth at least US$1.6 billion, but analysts believed the company would do well to receive US$1 billion. Talks were ongoing.

Additional asset sales in 2009 were possible, but the challenge was receiving fair market value for construction material assets during a global recession.13 One asset on the potential chopping-block was the company’s Australian 13 Fair market value is an estimate of the market value of an asset based on what a knowledgeable, willing, and unpressured buyer would pay to a knowledgeable, willing, and unpressured seller in the market. The most common example of this is the sale of a house. It could be sold in one hour or one day during crisis, but the seller would not receive fair market value.

Exhibit 7. CEMEX Cash Flows in 2009 … if ….

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operations, the Ready-Mix business acquired as part of the Rinker deal. It had never been the true target of the acquisition, and its sale might yield US$400 to US$500 million.

Dividends and Equity Issuance. CEMEX’s dividend in 2008 absorbed US$476 million in cash flow, down from over US$608 million in 2007 (the dividend had been cut in the first quarter of the year). Reducing or eliminating the dividend was always a possibility, but clearly a very unpopular one with shareholders. One alternative in discussion was to replace the cash dividend with an equity share dividend, where shareholders would receive some proportional additional shares in the company instead of cash.

New equity issuance was also a possibility. CEMEX had consistently issued between US$400 and US$500 million in new equity every year, a common practice in firms of its size growing rapidly. Most of these issuances had been in the form of rights issues, where existing shareholders were given the choice of buying new issuances before the public market, allowing them to retain their proportional ownership interest if they desired. Like asset sales, this was not good timing for new equity issuance. Economic conditions were down, construction materials sales were down, and CEMEX’s sales and profits were down. Yet, equity issuances in times of need like this were not unheard of.

Creditor Interests Creditors have three basic concerns when working with borrowers experiencing difficult times:

1. Keep the loan in performing status. Banks do not want to classify an outstanding loan as non-performing, and then proceed, as required by law, to start writing down the loan’s value. Whatever the debt covenants and repayment requirements, the bank needs to be able to classify the loan as performing.

2. Continue to earn a market rate of interest. Banks, like all businesses, must earn a risk-adjusted return on their business activities. If a borrower’s credit quality has declined, meaning they are now considered riskier, interest payments on the loans should be adjusted to reflect this, as would be the case if the borrower went directly to the market now to raise funds.

3. Have a realistic plan for full repayment. Banks need to be able to believe in the future business and cash flow prospects of the borrower. Has the borrower put together a strategy and financial plan that seems reasonable and provides adequate cash-flow-generating potential to repay the debt?

Whatever CEMEX formulated as a financial plan for 2009, it would have to meet creditor’s needs.

The Restructuring Plan CEMEX needed a plan for 2009. Hard choices would have to be made, and if the company did not make them soon, the markets—and creditors—may do it for them. Regardless of specific actions taken, one was clearly needed immediately—the renegotiation of the US$5.5 billion due to mature in 2009. It was time to start talking with the bankers.

Fair market value would come from the house being sold over a longer period of time when a seller could reach a more equitable sale price with a willing buyer.

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Appendix 1. Cemex, Statements of Income, 2004-2008

(US$ million) 2004 2005 2006 2007 2008 Revenues 8,153.03 15,299.42 18,246.40 21,693.85 17,772.96 Operating expenses (excl deprec) (5,613.61) (11,747.32) (14,109.39) (17,103.32) (14,208.10) EBITDA 2,539.42 3,552.10 4,137.01 4,590.53 3,564.86 Depreciation (686.90) (1,068.94) (1,191.66) (1,616.20) (1,527.13) Operating income (EBIT) 1,852.52 2,483.16 2,945.35 2,974.33 2,037.73 Other income & associates 38.38 496.61 503.49 686.08 (2,885.15) Net interest (348.97) (486.22) (448.12) (728.38) (704.76) Profit before tax (EBT) 1,541.93 2,493.55 3,000.72 2,932.03 (1,552.18) Tax (213.18) (329.97) (512.91) (462.15) 1,721.89 Profit after tax 1,328.75 2,163.58 2,487.81 2,469.88 169.71 Minorities / preferred dividends (20.94) (54.96) (110.26) (76.74) (3.26) Net income 1,307.81 2,108.62 2,377.55 2,393.14 166.45   Per share (US$) 2004 2005 2006 2007 2008 EPS 1.96 3.03 3.30 3.22 0.22 Net Dividend per share 0.58 0.66 0.74 0.82 0.62

Source: Company accounts, UBS estimates, October 1, 2009.

Appendix 2. Cemex, Balance Sheets, 2004-2008

(US$ million) 2004 2005 2006 2007 2008 Cash and equivalents 342.49 600.61 1,578.53 794.77 994.17 Other current assets 1,610.04 3,560.18 3,581.55 4,819.07 3,995.54 Total current assets 1,952.53 4,160.79 5,160.08 5,613.84 4,989.71 Net tangible fixed assets 13,590.80 21,008.09 22,792.82 24,033.08 20,606.56 Net intangible fixed assets - - - 17,933.06 15,588.42 Investments / other assets 1,845.37 1,556.93 2,014.28 2,130.30 4,290.26

Total Assets 17,388.70 26,725.81 29,967.18 49,710.28 45,474.95

Trade payables & other short term liab’s 1,369.26 2,918.68 3,184.83 4,320.24 4,205.67 Short-term debt 1,044.20 1,189.20 1,251.08 3,323.38 6,962.29 Total current liabilities 2,413.46 4,107.88 4,435.91 7,643.62 11,167.96 Long-term debt 4,889.03 8,275.19 6,288.58 16,559.37 11,899.03 Other long-term liabilities 1,862.86 4,003.49 4,466.48 6,793.98 5,179.03 Total liabilities 9,165.35 16,386.56 15,190.97 30,996.97 28,246.02 Equity & minority interests 8,223.35 10,339.25 14,776.21 18,713.31 17,228.93

Total Liabilities & Equity 17,388.70 26,725.81 29,967.18 49,710.28 45,474.95

Source: Company accounts, UBS estimates, October 1, 2009.

For the exclusive use of A. Robinson, 2019.

This document is authorized for use only by Ashley Robinson in FIN-336 Multinational Corporate Finance 19EW1 taught by SNHU INSTRUCTOR, Southern New Hampshire University from Jun 2019 to Nov 2019.

12 A02-17-0008

Appendix 4. CEMEX’s Share Price (ADS, NYSE)

Appendix 3. CEMEX, Statements of Cash Flow, 2004-2008

Statement of Cash Flows (US$ million) 2004 2005 2006 2007 2008 Net income 1,307.81 2,108.62 2,377.55 2,393.14 166.45 Depreciation 686.90 1,068.94 1,191.66 1,616.20 1,527.13 Net change in working capital (212.98) (33.26) 280.26 156.99 (149.77) Other (operating) 448.05 280.22 234.16 17.53 871.96 Net cash from operations 2,229.78 3,424.52 4,083.63 4,183.86 2,415.77

Capital expenditure (434.19) (784.28) (1,515.88) (1,996.30) (1,746.58) Net (acquisitions) / disposals (739.39) (3,875.04) 396.86 (15,191.00) 893.30 Other changes in investments (322.72) 662.41 (910.98) - (146.41) Cash from investing activities (1,496.30) (3,996.91) (2,030.00) (17,187.30) (999.69)

Increase / (decrease) in debt (295.26) 824.28 (1,268.99) 11,193.55 302.21 Share issues / (repurchases) 379.35 428.34 518.05 583.61 460.51 Dividends paid (387.90) (457.31) (531.36) (608.26) (476.21) Other cash from financing (399.64) 33.81 162.55 934.17 (1,342.06) Cash from financing activities (703.45) 829.12 (1,119.75) 12,103.07 (1,055.55)

Cash from changes in cash & equivalents 30.03 256.73 933.88 (900.37) 360.53 FX / non-cash items 18.38 (14.71) 53.34 132.22 - Balance sheet changes in cash & equivalents 48.41 242.02 987.22 (768.15) 360.53

Note: Maintenance capex (408.66) (486.32) (824.00) (658.63) (1,155.38)

Source: Company accounts, UBS estimates, October 1, 2009.

For the exclusive use of A. Robinson, 2019.

This document is authorized for use only by Ashley Robinson in FIN-336 Multinational Corporate Finance 19EW1 taught by SNHU INSTRUCTOR, Southern New Hampshire University from Jun 2019 to Nov 2019.