Cross-border issues always add extra complexity to M&A deals. But in the Cemex acquisition of RMC, co-lead managed by Citigroup and Goldman Sachs, there was clearly no language barrier, writes Nick Kochan.
When you are doing a cross-border deal, it helps if your codename makes sense in your client’s language as well as your own. This was not quite the case in Cemex’s purchase of RMC in September. When the English-speaking bankers referred to the deal among themselves, they called it Bromium. When they talked to their Spanish-speaking clients, they called it Bromo.
And the bankers also had different interpretations of the name: one thought it was named Bromo after a volcano in Java, while another thought it was called Bromium after an ingredient in cement. Cross-border communication between bankers and client might have got horridly confused. In fact, relations were faultless.
The market heard about the deal on September 27 and was excited by its sheer size. Cemex, Mexico’s cement manufacturer, paid no less than $4.1bn in cash for RMC, the British cement producer. The company also assumed RMC’s debt, taking the deal’s value up to $5.8bn. This was the largest cross-border deal ever accomplished by a Mexican company. The terms of the acquisition represent a premium of approximately 39% to RMC’s average price of 615p per share over the previous 30 days.
Shares raid
But the size of the deal was not the only thing that excited the market. As soon as it was announced, Cemex went into the market, and snapped up 19% of RMC’s shares within an hour. According to Philip Robert-Tissot, Citigroup’s managing director for mergers and acquisitions: “This sort of raid is relatively rare but it demonstrated Cemex’s determination to ward off other bidders and get the transaction closed.”
Simon Dingemans, managing director in the investment banking division at Goldman Sachs, says: “Doing this sort of arrangement is quite unusual, given the normal uncertainties around any bid process, but Cemex was confident enough of its ground to move in straightaway.”
Preparation and co-operation
The morning raid on the market that sealed the deal for Cemex was the result of extensive preparation by the two banks advising the company. Cyrus Shabi, managing director of Citigroups European building materials team, says: “We decided we wanted to do it, we planned it and it worked. It’s a good microcosm of the transaction, because all went to plan. It’s a boring message. But it’s true.”
Cemex’s confidence was partly reinforced by the pre-announcement negotiations between the two companies. This had resulted in an offer that RMC and its advisers were prepared to recommend to its shareholders. But Basil Geoghegan, Goldman Sachs’ executive director, investment banking division, says there were quite extensive negotiations before the price was agreed. “Clearly, we’re keen to pay the lowest price we can and the other side are keen to get the highest price. It ends up as a negotiation, and we ended up at a 40% premium. We and the client were very happy.”
The progress of the deal was smooth, but much of this must be attributed to particularly close co-operation between two of the market’s heavy hitters. This had a quite unusual origin. When Lorenzo Zambrano, the chairman and chief executive of Cemex, the country’s largest company and the world’s third largest cement maker, plotted the acquisition, he turned to Citigroup and Goldman Sachs, both banks with which Cemex had close relationships. Citigroup had advised him on his $2.8bn acquisition of Southdown, the US cement maker. Citi also had a close relationship with Cemex on the lending side through its acquisition of the Mexican unit Banamex some years earlier. Goldman Sachs, meanwhile, had been talking to Cemex about its strategic plans for some time.
Mr Zembrano asked Citigroup and Goldman Sachs to do exactly the same preparatory work. The two banks devised acquisition strategies, in parallel, for several weeks, without talking to each other. “It was quite a rare way for a client to behave, but it was actually a very smart thing to do. Cemex was getting two genuinely independent views on everything,” says Mr Robert-Tissot.
Equal partners
The banks were told they had a joint mandate, and they worked in a very close partnership to develop a combined strategy. Bankers from both sides already knew each other well, as they had worked closely on three previous deals in the course of the year. Neither bank was given the lead position, so they regarded everything as equal: both spent a similar number of hours on the job and they divided up the work.
Teams from the two banks also held joint meetings, but in terms of location, Goldman had the slight edge. “I am happy to confirm that we did most of the meetings at Goldman’s offices on Fleet Street, or at Slaughter and May in the City, rather than out at Canary Wharf,” jokes Mr Robert-Tissot.
“Both banks contributed equally to providing finance, as they did to offering advice,” says Jan Skarbek, Citigroup’s director in mergers and acquisitions. “Our financing teams worked as closely together as we worked on the advisory side. That has the benefit of keeping it confidential as there are only two banks that knew about the deal before RMC was approached.”
The financing was more complex than the M&A advisory work. “From an advisory perspective, it is a relatively large transaction with a number of challenges, but in the end, the result was actually quite plain-vanilla. It is quite an impressive example for both organisations of internal cross-border co-operation. We produced a fantastic result for the client with no leak,” says Mr Dingemans.
Financing structure
The financing structure required Cemex Holding’s Mexican operation to borrow $750m, split between $500m as a one-year term loan, with an option to extend for six months, and $250m as a three-year term loan.
A holding company was created to borrow $1250m. This was also split between $500m, which took the form of a one-year revolver (extendable by six months) and $750m as a three-year term loan. Finally, Cemex Espana International Operations borrowed $3800m. This was regarded as a back-up facility for refinancing RMC debt as required and was split three ways. The first part was a $1500m one-year back-up loan; the second part was a $1150m three-year term loan; and, finally, the deal comprised a $1150m term loan.
Something to celebrate
The financing has received a strong welcome from the market, say the bankers. Potential counterparties interested in taking some of the debt like Cemex’s strong credit. Although some commented that the company had paid a high price, its investment bankers argued that $5.8bn was a manageable price against the company’s $1.5bn annual cashflow. The deal will be completed around the end of 2004, and these two teams of financial heavyweights look forward to drinking a glass of tequila to celebrate.
