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Tuesday, May 28, 2024

M&A strategy drives growth at rock crusher Martin Marietta Materials.

CEO Ward Nye and Michael Petro, senior vice president of strategy and development.

The most important documents for Martin Marietta Materials and CEO Ward Nye were created 15 years ago and have been updated twice.

They’re called “SOAR,” for strategic operating analysis and review, and they’re the blueprint for the 85-year-old company, which has become a national leader in the business of mining rocks used in many types of construction. They analyze the Raleigh-based company’s geographic and product markets, studying whether it should hold, expand, exit or target competitors. They review state and federal budgets for building roads, highways and other construction projects that require aggregates, as well as expected population growth and the company’s competitive status.

“This is a highly fragmented industry,” says Michael Petro, senior vice president of strategy and development. “Our strategy doesn’t really change every five years; it just gets refreshed.”

The strategy has worked extremely well. Raleigh-based Martin Marietta Materials reported record revenue and earnings in 2023, and its stock price has gained nearly 80% in the past year through mid-April. Nye says better performance is coming.

Using its SOAR strategy, the company sold its Texas cement business for $2.1 billion in February after imports became a bigger part of that market. It used that money to buy
20 aggregate mines in the Southeast, betting on more government spending on building highways, roads, bridges and streets from both the federal JOBS Act signed into law in late 2021 and state DOT budgets. Two markets – Nashville and Miami – included in that deal are ones that Martin Marietta has long coveted because of SOAR.

Pent-up demand for residential construction will fuel more growth, Nye argues. The changes also align with the company’s primary focus on the Southeast and Southwest economies, projected to grow faster than other U.S. regions.

Nye notes that the company’s market capitalization has doubled in each of the last three of the company’s five-year SOAR timeframes. He’s ahead of that goal for the latest five-year plan, which started in 2021. Its stock performance over the last five years has ranked among the top 10 of North Carolina public companies, gaining more than 200% through mid-April. That compares with a 95% rise for the S&P 500 index, of which it is a part.

“We have plenty of dry powder to continue doing what we’re doing,” says Nye. “We think states like North Carolina and others in the Southeast and Southwest, where the population trends have been so significant and will continue to be significant, we have to be focused on capacity expansion.”

Nye’s strategy has garnered the respect of Wall Street analysts and business experts. At a market capitalization of $37 billion, it’s worth slightly more to investors than rival Vulcan Materials, a Birmingham, Alabama-based company that has a market cap of about $35 billion. The N.C. company’s $6.8 billion in revenue last year trailed Vulcan by about $1 billion.

Declining interest rates would boost Martin Marietta’s residential construction business, says Stephens analyst Trey Grooms, adding that its recent acquisitions will boost its profits and “creates a more durable earnings base.” Jefferies analyst Philip Ng predicts that the company “will remain active on the M&A front in 2024” and believes a deal similar to the $2 billion purchase of Blue Water Industries’ 20 mines in the Southeast is a potential. In addition, Raymond James analyst Patrick Tyler Brown expects the company will increase prices later this year, fueling more revenue and earnings growth.

Duke University business professor John Graham teaches a corporate finance course in which he uses Martin Marietta’s mergers and acquisitions strategy to teach students how the company allocates its money. He notes the company’s approach to buying and selling to expand its business in the right markets and at the right times.

“They’re disciplined in their acquisition activity,” says Graham. “They are trying to grow, but they’re trying to do it pragmatically, not excessively cautious, but not crazy. They accumulate resources. And they have in mind a price they’re willing to pay. They seem to have the discipline to walk away if it’s not the right deal for them. They don’t try to strong-arm these smaller quarries that they’re buying. They have a fair conversation with them, saying ‘Here’s what we think
it’s worth.’”

Martin Marietta produced 200 million tons of aggregate in 2023. In its SOAR analysis, it identified more than 200 million tons of aggregate being produced by family owned or private quarries that are in markets where it would like to expand. “We like to say there’s another Martin Marietta out there in M&A in markets that we want to be in,” says Petro. “And that 200 million tons is only about 10% of the total addressable market in the United States.”


SUCCESSION STORY
Deals have been the company’s DNA since its beginning. Founded as Superior Stone in Raleigh in 1939, with the first quarry in Red Hill, Virginia, the company was purchased by American-Marietta in 1959 and merged with aerospace contractor Glenn L. Martin Co. in 1961 to become Martin Marietta. In 1995, it was acquired for $10 billion by defense giant Lockheed, then spun off as a separate company a year later.


Martin Marietta, which then had revenue of about $660 million, was led by Steve Zelnak, who had joined the business in 1981 and became CEO a year later. During his 27 years as the company’s top boss, he oversaw more than 70 acquisitions. “Steve is all about understanding the marketplace and understanding the customer,” says Nye, who stays in touch with Zelnak, who lives in Raleigh.

Nye, who holds a bachelor’s degree from Duke University and law degree from Wake Forest, was working as an attorney in the early 1990s for a firm whose largest client was a building materials company. He then spent 13 years at Hanson, a London-based holding company that ended up spinning off all of its businesses except the building materials operation. His jobs included running the company’s mergers and acquisition team, heading the East division based in Raleigh, then working in Dallas as executive vice president of North American operations.

In 2006, he got a call from Martin Marietta, which was looking for Zelnak’s successor. He jumped at the chance, serving as president from 2006-09, then became CEO a year later when revenue was $1.8 billion and the market cap was $4.2 billion.

It was during his initial years at Martin Marietta when it developed the SOAR process. Nye says the company spent 30,000 internal man-hours examining each of its markets, including 11 mega-regions that make up 70% of U.S. population growth. Those included markets, such as the Piedmont and the Gulf Coast, where Martin Marietta had a strong presence and others, such as Florida, where it had no operations.

Armed with the SOAR strategy, Nye started making deals. “We’ve been very dedicated to this process,” he says. “It was never something that was a lovely PowerPoint presentation that you then stuck on a shelf and didn’t live by.”

One of his first moves as CEO was to hold merger talks with his biggest rival, Vulcan. When those discussions broke down, Nye launched a $5 billion hostile takeover in 2012 that was blocked by a Delaware judge, who argued that Martin Marietta had violated confidentiality agreements. Martin Marietta said that the combined companies would be better equipped to withstand an economic downturn and could save as much as $250 million in costs, while the two had few competing operations.

“I think Vulcan has made us better,” says Nye. “I think we’ve made them better. And I think when people are deciding where they want to invest, oftentimes it’s coming down to one or the other, and sometimes both, and that’s the highest compliment.”

DEALS AND DEALS

Aerial view of Martin Marietta Hickory quarry.

In late 2011, the company exchanged its quarries and distribution yards along the Mississippi River in exchange for French company Lafarge’s quarry sites, ready-mix concrete and asphalt plants, and a road-paving business in Colorado.

In 2014, Martin Marietta spent $2.7 billion to acquire Texas Industries, increasing its cement presence in Texas and California. When the deal closed, Martin Marietta’s market capitalization was $8.8 billion, or less than a quarter of its current value. Nye says that deal gave the company a bigger presence in fast-growth markets such as Dallas-Fort Worth and San Antonio. “We’re not a nationwide cement company and don’t intend to be,” says Nye. “But we’re a strategic cement company.”

Four years later, it bought Bluegrass Materials, the largest privately-held, pure-play aggregates company in the United States, for $1.625 billion in cash. The transaction included quarries across Georgia, South Carolina, Maryland, Kentucky and Tennessee.

The next big deal occurred in 2021. Martin Marietta had ended 2020 with a market capitalization of $17.7 billion and revenue of $4.7 billion. The company bought Lehigh Hanson’s U.S. West region for $2.3 billion, giving it 17 new sites in California and Arizona, and a deep-water import terminal in San Francisco. The deal added 13 million tons of annual aggregate production, 1.5 million tons of cement from two plants and 2.8 million tons of asphalt production from two plants.

With that deal, Martin Marietta now has a large presence in 10 of the 11 mega regions cited in its SOAR strategy, with only the Pacific Northwest lacking a strong company operation. (It has one location in Seattle.)

Selling the Texas cement business earlier this year, says Nye, was due to imports becoming more a part of the Texas market. The United States imported $2.2 billion worth of cement in 2022, and Cement Distribution Consultants in Amsterdam reports that about 80% of the cement imported into Houston and Corpus Christi comes from Turkey. “It was no longer really meeting our defined role of strategic cement,” says Nye. “And it allowed us to somewhat serendipitously take those funds and redeploy them into a pure aggregates business.” Its remaining cement plant, in the Dallas-Fort Worth market, is far enough away from Houston that it won’t be affected by imports, the company believes. (The company sold a California cement plant in 2023 for $317 million in cash, and it sold its Colorado and Central Texas ready-mixed concrete operations to Smyrna Ready Mix Concrete in 2022.)

Two particularly attractive markets studied by the company are Austin, Texas, and in northern Virginia near Washington, Petro says.

As for future deals, Petro says the company often holds conversations with potential sellers for years. “It’s usually a succession issue or family issue,” he says. “We like to stay in front of them and talk to them regularly about how we would handle a transaction if they were willing to sell. What they typically want, especially with a family business, is that their people are taken care of. And we like to think we’re a pretty good place for people to come to work.”

Duke University professor Graham calls that a smart strategy. “You can’t walk in there and be a city slicker and be full of yourself and talk to these owners,” he says. “They will shut the door on you and not open up.”

Deal making is preferable to starting new quarries, a tough process entailing finding 500 acres near a metropolitan market where there’s quality stone near the surface. Then the aggregates enterprise has to go through a lengthy rezoning and permitting process, along with gaining environment and water permits. Not many people want to live near a quarry, either.

“That’s not a matter of months, but a matter of years,” says Nye.

The alternative, which Martin Marietta is mastering, is making deals for existing sites. “One of the things that we do extraordinarily well is plan and execute, particularly around mergers and acquisitions,” says Nye. “If you go back over the 30 years we’ve been a public company, literally well over 100 transactions, it would be hard to find some that didn’t go as we hoped.”

Chris Roush
Chris Roush
Chris Roush is executive editor of Business North Carolina. He can be reached at croush@businessnc.com.

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