Latin American Equity Research Mexico City, April 10, 2007 Flashnote Mexico Cement & Construction CEMEX Cemex Increases its Offer for Rinker by 22% Gonzalo Fernandez* BUY Vivian Salomón* Mexico: Banco Santander, S.A Mexico: Banco Santander, S.A. (5255) 5269 1931 (5255) 5257-8172/ gofernandez@santander.com.mx vsalomon@santander.com.mx (04/10/07) CURRENT PRICE: US$35.00/M$38.50 TARGET PRICE: US$36.00/M$41.00 News Cemex announced On April 10, 2007, that it has raised its bid for Rinker by 22%, an offer the Rinker Board has recommended its shareholders accept. Company Statistics Bloomberg CX 52-Week Range (US$) 23.84-37.58 2007E P/E Rel to the IPC (x) 0.74 2007E P/E Rel to the Sector (x) 0.86 Mexico IPC Index (US$) 2,684.33 3-Yr CAGR (06-09E) 8.7% Market Capitalization (US$ Mn) 25,652 Float (%) 67 3-Mth Avg Daily Vol (US$ Million) 128.2 Shares Outst (Million ADRs) 732.9 Net Debt/Equity (x) 0.92 Book Value per ADR (US$) 9.68 Estimates and Valuation Ratios 2005 2006 2007E 2008E Net Earn (M$) 22,425 27,914 25,533 27,319 Current EPS 3.28 2.20 3.38 3.52 Net Earn (US$) 2,112 2,378 2,220 2,376 Current EPADR 2.88 3.31 3.03 3.24 P/E (x) 12.1 9.9 11.6 10.8 P/Sales (x) 1.7 1.5 1.5 1.4 P/CE (x) 4.3 8.3 10.0 8.8 FV/EBITDA (x) 9.8 8.2 7.3 6.3 FV/Sales (x) 2.3 1.9 1.8 1.6 FCF Yield (%) 16 10 10 11 Div per ADR (US$) 0.58 0.65 0.75 0.80 Div Yield (%) 1.7 1.9 2.1 2.3 Sources: Bloomberg, Company reports and Santander Investment estimates. News/Analysis: Cemex management issued a press release on April 10, 2007, stating that it has increased its cash price offer for the Australian cement company, Rinker, by 22% (from the original offer price) to US$15.85 per share, for a total firm value of US$15.3 billion. As a result, Rinker s board of directors unanimously recommended its shareholders accept the offer in the absence of a higher bid. Cemex management also said that it will officially extend the offer until May 18, 2007.At the increased price, Cemex would be paying a FV/EBITDA of 10.4 times for Rinker over the last twelve months, as of December 2006, a 30% premium over Cemex s 8.0 times figure, and consistent with the control acquisition premium in the sector. Cemex s Net Debt/EBITDA multiple would increase to 4.0 times as a result of the purchase, which, in our opinion, would not threaten the company s investment grade rating. The combined FV/EBITDA ratio for Cemex (with Rinker) would increase from 8.3 times before the acquisition to 8.9 times, in line with Cemex s threeyear average. Net/Net: 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. Valuation and Risks to Investment Thesis: Our year-end 2007 target price is based on a discounted free cash flow valuation. We used an 8.4% discount rate and a 1.0% terminal growth rate. Our target price implies a target FV/EBITDA of 8.5 times for year-end 2007. Risks: In our opinion, the main concern at present is the impact of the slowdown in the housing sector on cement demand, and Cemex s results in the U.S. In our opinion, despite the positive results in other markets, this has affected investor sentiment regarding Cemex that may not change until we see evidence of the U.S. market bottoming out. Other risks concern changes in economic conditions and the construction markets in which Cemex operates, and major movements in exchange and interest rates. * Employed by a non-us affiliate of Santander Investment Securities, Inc. and is not registered/qualified as a research analyst under NASD rules.
Cemex Flashnote NEW CONDITIONS OF THE OFFER FOR RINKER Cemex announced on April 10, 2007, before the market opened, that it had reached and signed an agreement with Rinker Group Limited ( Rinker ) (ASX: RIN, NYSE ADR: RIN) under which it would raise its cash offer price to US$15.85 per share. As a result, Rinker s Board of Directors unanimously agreed to recommend its shareholders accept the offer at this price, in the absence of a better proposal. Cemex's current offer represents a 45% premium to Rinker s last traded share price during October 27, 2006, when Cemex announced its original offer price. The latest bid is 22% above Cemex s original offer of US$13.00/share. CEMEX has agreed not to adjust the offer price for the dividend paid by Rinker in December of 2006. The total enterprise value of the transaction, including Rinker s debt, is approximately US$15.3 billion. The offer is apparently Cemex s best and final offer, in the absence of a higher bid, and will be extended until May 18 2007. IMPACT ON CEMEX The acquisition of Rinker would increase Cemex s EBITDA by 35% and its FCF by 23% based on the full-year 2006 results of both companies. The acquisition would be immediately accretive in terms of EBITDA and net income, because Rinker s margins are higher than Cemex s. Figure 1. Operating Indicators for Cemex and Rinker, 2006 (US Dollars in Millions) Cemex Rinker Combined Increase Sales 18,249 5,467 23,716 30% Oper Profit 2,946 1,249 4,195 42% Oper Margin 16.14% 22.40% 17.69% EBITDA 4,138 1,468 5,606 35% EBITDA Margin 22.68% 26.50% 23.64% Net Profit 2,378 806 3,184 34% Net Margin 13.03% 14.50% 13.43% FCF 2,689 610.7 3,300 23% FCF / EBITDA 64.98% 50.10% 58.86% Rinker s results for the last twelve months are as of December 2006. Sources: Company reports. In terms of valuation, Rinker would be valued at a FV/EBITDA of 10.4 times for the last twelve months ended December 2006 at the new offer price (Rinker s fiscal year closes on March 31, 2007), a 30% premium over Cemex s current FV/EBITDA of 8.3 times, and consistent with a control acquisition premium. The combined FV/EBITDA ratio for Cemex would increase from 8.3 times before the acquisition to 8.9 times afterward, in line with Cemex s three-year average. Finally the net-debt-to-ebitda ratio would increase to 4.0 times as a result of the deal. However, Cemex management maintains its commitment to return to a Net Debt/EBITDA ratio of 2.7 times within two years. 2
. Figure 2. FV/EBITDA Valuation of the Acquisition, 2006 (U.S. Dollars in Millions) Market Cap 25,459 Cemex + Rinker Cemex + Rinker Net Debt 7,061 Minorities 1,919 Firm Value 34,439 15,300 49,739 EBITDA 4,138 1,468 5,606 FV/EBITDA 8.3 10.4 8.9 Net Debt 7,061 15,300 22,361 Net Debt/EBITDA 1.71 3.99 Sources: Company reports and Santander Investment estimates, Figure 3. Cemex FV/EBITDA Historic Trailing Twelve Months 12.00 11.00 10.00 After Acquisiton 9.00 8.00 7.00 6.00 5.00 4.00 1/2/2004 4/2/2004 7/2/2004 10/2/2004 1/2/2005 4/2/2005 7/2/2005 10/2/2005 1/2/2006 4/2/2006 7/2/2006 10/2/2006 1/2/2007 4/2/2007 EV_EBITDA 3 Year Average Sources: Company reports and Santander Investment. Considering the estimated synergies disclosed by Cemex and the new value of the purchase offer out year-end 2007 target price would increase to US$37.6 per Cemex ADR, representing a potential upside of 7.0% from current price levels. However, we believe that after the full due diligence of Rinker is complete; Cemex could identify additional potentially accretive synergies. Furthermore, Cemex has stated that besides the above-mentioned operating synergies, there are potential savings in areas such as: capex; working capital; and taxes; none of which have been quantified at present. Figure 3 below presents a sensitivity analysis for our 2007 year-end target price to the potential synergies provided by Rinker. 3
Cemex Flashnote Figure 3. Sensitivity Analysis to Potential Synergies in Rinker Potential Synergies (US$ Million) 2007 Target Price Upside 130 37.60 7.0% 150 38.40 10% 170 39.00 11% 190 39.50 13% 210 40.00 14% 230 40.50 16% 250 41.00 17% Sources: Santander Investment estimates. Risks: (1) The acquisition would significantly increase Cemex s exposure to the housing market in the U.S. (mainly in Florida), which, according to management, generates 50% of Rinker's revenues in the U.S. This is an area currently a subject of concern due to the slowdown in the U.S. real estate market and the problems related to sub-prime lending, the impact of which on the overall housing market is still uncertain; (2) Cemex s debt would rise significantly again, which may lead to ratings being revised again. 4
IMPORTANT DISCLOSURES Cemex Three-Year Stock Performance (U.S. Dollars) 40 35 30 25 20 B $14.50 12/16/03 B $16.00 1/28/04 B $17.00 5/24/04 H $15.75 09/27/04 15 B $21.00 B $25.00 4/27/05 7/26/05 10 D-03 M-04 J-04 S-04 D-04 M-05 J-05 S-05 D-05 M-06 J-06 S-06 D-06 Cemex (L Axis) B $19.00 12/13/04 B $22.00 5/19/05 SB $36.50 12/16/05 SB $31.00 10/27/05 IPC (R Axis) B $36.00 10/31/06 B $34.00 6/13/06 3,000 2,500 2,000 1,500 1,000 500 Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review Source: Santander Investment. 5
Key to Investment Codes IMPORTANT DISCLOSURES Rating Definition % of Companies Covered with This Rating % of Companies Provided Investment Banking Services in the Past 12 Months Buy Expected to outperform the local market benchmark more than 5.0%. 50.75% 73.33% Hold Expected to perform within a range of 5.0% above or below the local market benchmark. 39.55% 26.67% Underperform/Sell Expected to underperform the local market benchmark more than 5.0%. 9.70% The numbers above reflect our Latin American universe. For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2007 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53 rd Street, 17 th Floor (Attn: Research Disclosures), New York, NY 10022 USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk premium, unless otherwise specified. The benchmark plus or minus the 5% differential used to determine the rating is time adjusted to make it comparable with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) 350 3974. This report has been prepared by Santander Investment Securities Inc. ( SIS ) (a subsidiary of Santander Investment S.A., which is wholly owned by Banco Santander Central Hispano, S.A. ("Santander"), on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (SCH Bolsa), and in the United Kingdom by Santander Central Hispano S.A., London Branch (Santander London), which is regulated by the Financial Services Authority in the conduct of investment business in the UK. This report is not being issued to private customers. SIS, Santander London, and SCH Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Gonzalo Fernandez and Vivian Salomon. Grupo Santander receives non-investment banking revenue from the subject company. Within the past 12 months, Grupo Santander has managed or co-managed a public offering of securities of Cemex. Within the past 12 months, Grupo Santander has received compensation for investment banking services from Cemex. In the next three months, Grupo Santander expects to receive or intends to seek compensation for investment banking services from Cemex. The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date of this report and are subject to change without notice. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States. 2007 by Santander Investment Securities Inc. All Rights Reserved. 2007