vulcan materials activist situation report

The Shareholder Communication Strategists

The objective of the Activist Situation Report is to highlight key issues that might be raised by the

dissident investor in a proxy contest. This report is not intended to provide voting recommendations.

For a more detailed discussion of our analysis, please contact Waheed Hassan, CFA at

[email protected] or 202-549-8399.

Summary

• On December 12, 2011, MLM publicly disclosed its unsolicited bid for Vulcan stock by offering 0.5

shares of MLM stock for each Vulcan common stock. Concurrently, MLM also commenced an

exchange offer for all of the outstanding shares of Vulcan common stock. The Exchange Offer is

scheduled to expire on May 18, 2012, unless further extended by MLM. Since 2010, Vulcan and

MLM had engaged in potential merger discussions but failed to reach an agreement.

• Following rejection of its offer, MLM initiated a proxy contest to replace five incumbent nominees at

Vulcan. MLM hopes that election of its nominees would send a strong message to Vulcan board and

management team to engage in merger negotiations.

• Given that this is an M&A driven proxy contest, Vulcan shareholders have to decide if a) the offer is

reasonably certain; b) the value being offered is a reasonable starting point for engagement; and c)

whether Vulcan’s board response was appropriate.

• The proposed merger between Vulcan and MLM makes strategic sense. However, our review of

MLM’s offer suggests that it is not in the range of what Vulcan shareholders might deem as

‘reasonable’. The offer – though certain – provides a meager premium and is almost at par with

Vulcan’s stand-alone valuation. Consequently, we believe, in absence of a higher offer by MLM,

Vulcan shareholders might conclude that the offer is not a reasonable starting point for engagement

and therefore MLM nominees do not deserve a seat at the table – board representation.

• Despite inadequacy of tender offer, MLM may still succeed in proxy contest because of the

significant overlap in the top holders of both companies. These holders may drive the election of

dissident nominees to Vulcan’s board, strictly because they will benefit financially from a merger of

the two companies.

Target: Vulcan Materials Company (VMC)

Activist/Dissident: Martin Marietta Materials Inc. (MLM)

Offer: 0.5 shares of MLM stock for each VMC share

At stake: 5 seats on an 11-member board

Board composition: Classified board

Meeting date: TBD. Last shareholder meeting was held on 05/13/2011.

Probable outcome: In absence of a higher bid, management nominees are

re-elected.

March 9, 2012


2

Analytical Framework

Alliance Advisors utilizes the same analytical framework that Institutional Shareholder Services (“ISS”)

and many institutional investors use when evaluating M&A related contested solicitation efforts.

Generally, ISS focuses on the following three key considerations for shareholders:

1. Is the offer reasonably certain?

2. Is the value being offered a reasonable starting point for engagement?

3. Has the target board’s response been appropriate?

Note that questions 1 and 2 are critical in determining if dissidents warrant board representation.

Meanwhile, question 3 tries to ascertain if the target board acted in the best interest of its shareholders.

Question 1 – Is the offer reasonably certain?

MLM’s all-stock offer is not subject to financing condition. That said, MLM shareholders would have to

approve issuance of shares for the proposed merger. The risk of MLM shareholders not approving the

deal is fairly limited. As such, the offer can be deemed to be reasonably certain.

Question 2 – Is the offer a reasonable starting point for negotiation?

Historical Exchange Ratio

• MLM’s offer of 0.5 shares of MLM stock for each Vulcan share does not compare favorably with the

historical exchange ratio for the two companies. The offer represents a 9.3% premium to the

unaffected exchange ratio on 12/9/2011, a much smaller 5.4% premium to the 1-year average

exchange ratio and a 4.6% discount the 3-year average exchange ratio.

• Additionally, during periods of stronger economic growth – pre-2008 economic crisis – Vulcan

traded at a significantly higher exchange ratio than MLM’s offer. Given the low implied offer

premium, it seems unlikely that Vulcan shareholders would support MLM nominees in absence of a

higher offer.

• Based on the exchange ratio and MLM’s current share price ($86.39 as of 3/8/2012), the

$43.20/share offer represents a 3.8% discount to Vulcan’s current share price. Though the offer

discount is indicative of market’s desire for a higher price, we believe Vulcan shareholders are

unlikely to support MLM’s bid for board seats unless they see a revised offer which provides a

reasonable premium.


3


Source: Thomson Reuters. Data as of 3/8/2012.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

13

/7/2

00

7

5/7

/20

07

7/7

/20

07

9/7

/20

07

11

/7/2

00

7

1/7

/20

08

3/7

/20

08

5/7

/20

08

7/7

/20

08

9/7

/20

08

11

/7/2

00

8

1/7

/20

09

3/7

/20

09

5/7

/20

09

7/7

/20

09

9/7

/20

09

11

/7/2

00

9

1/7

/20

10

3/7

/20

10

5/7

/20

10

7/7

/20

10

9/7

/20

10

11

/7/2

01

0

1/7

/20

11

3/7

/20

11

5/7

/20

11

7/7

/20

11

9/7

/20

11

11

/7/2

01

1


(as of 12/9/2011)

Historical exchange ratio 1-yr avg 3-yr avg Offer

3-yr avg. exchange ratio: 0.52x

1-yr avg. exchange ratio: 0.47x


4

Precedent Transaction Analysis

• MLM’s implied valuation is significantly higher than that for precedent transactions, suggesting that

the offer is reasonable. It is important to note that the precedent transactions took place during

robust market conditions, i.e., at relatively high market valuation.

That said, we believe Vulcan could contend that MLM’s implied valuation is high not because of

offer premium but instead due to depressed EBITDA given the cyclical trough for the underlying

business. For instance, Vulcan’s EBITDA declined from $980.6 million in FY07 to $425.2 million in

FY11. Overall, we feel that Vulcan’s argument is likely to resonate with investors. In a normalized

business environment, Vulcan’s EBITDA would be higher, resulting in a lower implied valuation

multiple for MLM’s offer. Consensus estimates suggest Vulcan’s EBITDA will increase to $589 million

by FY2013 and $718 million by FY14 (source: Thomson Reuters).

Precedent Transactions

Source: FactSet; precedent transactions data taken from Florida Rock Industries proxy statement.

Date Announced Acquiror/Target EV/LTM EBITDA

Feb-07 Vulcan Materials/Florida Rock 11.0x

Oct-06 Cemex/Rinker Group 9.4x

Jun-06

Cementos Portland

Valderrives/Corporacion Uniland 13.2x

May-06 Lafarge SA/Lafarge NA 8.3x

Jul-05 Spohn Cement/HeidelbergCement 8.1x

Oct-05 Camargo Correa/Loma Negra 11.6x

Jan-05 Holcim/Aggregate Industries 9.8x

Sep-04 Cemex/RMC 7.6x

Median 9.6x

Mean 9.9x

9-Dec-11 Martin Marietta/Vulcan 18.3x


5

Stand-Alone Valuation

• Both our stand-alone valuation analysis and analysts’ target price estimate for Vulcan suggests that

MLM’s offer does not represent any significant premium. While MLM is likely to contend that it is

seeking a “merger of equals” transaction and hence did not offer “acquisition premium”, Vulcan

shareholders are likely to treat MLM’s hostile offer as an acquisition of the Company instead and

therefore demand a premium.

Summary Valuation Analysis


Unaffected Trading Multiples

Source: Thomson Reuters/FactSet. Data as of 3/8/2012.

Peer group is comprised of MLM, CRG-DB, HEI-XE, HOLN-VX, LG-FR, MDU-US, EXP-US,

TXI-US, CEMEX.CPO-MX.

Valuation Calculation

Source: Thomson Reuters/FactSet. Data as of 3/8/2012.

Stand-alone

value

Initial Offer

Price (12/9/2012)

Premium/

(discount)

Current Offer

Price (03/8/2012)

Premium/

(discount)

EV/NTM EBTIDA $45.5/share $36.7/share -19.4% $43.2/share -5.1%

Analyst Target Price (Mean) $43.6/share -15.9% -1.0%

At announcement 12/9/2011 EV/NTM EBITDAPeer Median 7.9x

Vulcan 16.7

Premium/(Discount) 112.7%

Vulcan's implied trading multiple EV/NTM EBITDACurrent Peer Median (3/8/2012) 8.3x

Adjustment for Vulcan historical premium/(discount) 112.7%

Implied multiple 17.6x

Vulcan's Valuation Estimate EBITDAVulcan's NTM consensus estimate (FY2012) $480.6mn

Implied Enterprise Value 8,462.8

Less Debt (as of 12/31/2011) 2,815.4

Add Cash (as of 12/31/2011) 236.8

Implied Equity Value $5,884.2mn

Shares outstanding 129.2mn

Implied Stand-alone value $45.5/share


6

Analyst Estimates


Vulcan’s 5-year EV/NTM EBITDA Multiple


Peer group is comprised of MLM, CRG-DB, HEI-XE, HOLN-VX, LG-FR, MDU-US, EXP-US, TXI-US,CEMEX.CPO-MX

Target Price (USD)

Mean 43.63Median 42.50High 61.00

Low 29.00

Standard Dev 10.45

Total # 8

0

2

4

6

8

10

12

14

16

18

20

Historical EV/NTM EBITDA

as of 12/9/2011

VMC Peer Median


7

Synergies

• Vulcan and MLM have very divergent views of the level of synergies that can be achieved by

combining the two companies. Vulcan estimates potential synergies at $75-$100 million versus

MLM estimate of $200-$250 million. Our calculations show regardless which synergy estimate one

believes, shareholders would benefit significantly from a combination of the two companies. Our

two key assumptions for the said calculations are: (a) EBITDA is increased by the amount of

synergies; and (b) post-merger the combined entity would trade at MLM’s current EV/NTM EBITDA

multiple.

Synergies

Source: Thomson Reuters. Data as of 3/8/2012. Merger related expense from MLM’s SEC filings.

Vulcan estimate MLM estimateSynergies (low-end of the range) $75.0mn $200.0mn

MLM - EV/NTM EBITDA multiple (current) 12.0x 12.0x

Increase in Enterprise Value due to synergies $901.5mn $2,404.0mn

Less merger related expense 75.0mn 75.0mn

Net impact of synergies on Enterprise Value $826.5mn $2,329.0mn

Post-merger shares outstanding 110.2mn 110.2mn

Synergy value per share $7.5/share $21.1/share

Synergy value % of current offer ($43.2/share) 17.4% 48.9%


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Question 3 – Has the target board’s response been appropriate?

Given that Vulcan has yet to file its proxy statement, it is difficult to assess the appropriateness of its

board’s response. The discussion below is based upon MLM’s preliminary proxy statement, a current

source of public information regarding Vulcan’s response to MLM’s offer. As such, it highlights a

potential conflict of interest on Vulcan’s part, as identified in MLM’s preliminary proxy.

• Our analysis above suggests that MLM’s offer is not compelling enough and that Vulcan

shareholders would require an improved bid to support the merger. That said, our read of the

preliminary proxy statement filed by MLM indicates potential conflict of interest.

• Specifically, we note that during negotiations Mr. Donald James – CEO of Vulcan – insisted on

retaining CEO/Chairman position along with control of the top management team of the post-

merger entity. While discussion of post-merger management team is not unusual, generally such

details are finalized towards the end of a merger agreement after financial considerations have been

settled. In this case, however, it appears that Mr. James’ role in the post merger management team

assumed critical significance in the merger discussions. Below are some relevant excerpts from the

preliminary proxy statement.

June 16, 2010 – “Mr. James also stated Vulcan’s position that Mr. James be chief executive

officer of the combined company for a period of three years, followed by an additional period of

three years in which he would serve as executive chairman of the board of directors.” (Page 9.)

November 3, 2010 – “Mr. James indicated that he believed that he should have the role of

Executive Chairman and Mr. Nye should have the role of President, with no chief executive

officer of the combined company. They also discussed the composition of the board of directors

of the combined company and the location of the combined company’s headquarters.” (Page

10.)

April 25 and 26, 2011 – “Mr. James proposed that he manage the combined operations with

direct responsibility for legal, finance, government affairs, strategic planning and Board

management functions, with investor relations, human resources, business development, and

operations functions reporting to Mr. Nye., Mr. James proposed that after an agreed-upon

transition period, Mr. Nye would become chief executive officer of the combined company.”

(Page 11.)

June 27, 2011 – “Mr. James told Mr. Nye that Vulcan would only be interested in a business

combination with Martin Marietta at the market exchange rate without any premium to Martin

Marietta, in which Mr. James would be chairman of the board of directors and chief executive

officer, with a majority of senior management positions held by Vulcan personnel for a

transition period.” (Page 11.)


9

Impact of Overlapping Shareholders

• Given the strategic merits of the deal, shareholders desire to see a combination of the two

companies might lead to greater support for MLM nominees. In January 2012, Southeastern Asset

Management (9.9% stake in Vulcan and 13.3% in MLM) issued a public letter stating that “If Vulcan's

management and board of directors ignore Martin's invitation to resume talks, we will be forced to

vote for Martin Marietta's slate of directors and also contemplate publicly sharing these views with

other Vulcan Materials stakeholders.”

• Lastly, there is a significant overlap between the top 10 shareholders of both companies. This

creates the possibility of such holders supporting MLM nominees even if it doesn’t put the best offer

on the table. By virtue of being significant holders in both companies these shareholders stand to

benefit from the transaction regardless of whether Vulcan receives the highest price.

Common Shareholders of MLM and Vulcan


Conclusion

Our review of MLM’s offer suggests that it is not in the range of what Vulcan shareholders might deem

‘reasonable’. The offer provides a meager premium and is almost at par with Vulcan’s stand-alone

valuation. Consequently, we believe MLM has not met the burden to warrant a seat at the table –

board representation. That said, given the significant overlap between the top shareholders of both

companies there is a possibility that these overlapping shareholders would support MLM nominees even

if MLM doesn’t put the best offer on the table.

% of common shares outstanding MLM VulcanSoutheastern Asset Management, Inc. 13.33 9.87

Vanguard Group, Inc. 4.06 5.22

First Eagle Investment Management LLC 5.08 4.48

BlackRock Institutional Trust Company, N.A. 5.02 4.42

Total 27.49 23.99


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Disclaimer: No information available through this report is intended to constitute advice or

endorsement of any investment, tax or legal matter. Alliance Advisors believes the information

contained in this report to be reliable and correct. However, Alliance Advisors makes no

representation or warranty (express or implied) as to the accuracy, completeness or continued

availability of the information, materials and data available in this report. To the fullest extent

permissible under applicable law, Alliance Advisors accepts no responsibility or liability of any kind

with respect to the accuracy or completeness of the information, materials and data in this report.

Copyright © 2012 by Alliance Advisors, LLC. ALL RIGHTS RESERVED.

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