Breedon Regulatory News (BREE)

8 January 2020

Breedon Group plc ("Breedon" or "the Group")

Acquisition of certain assets and operations of CEMEX in the UK 

Breedon is pleased to announce that it has entered into a conditional agreement with CEMEX UK Operations Limited ("CEMEX") to acquire certain assets and operations in the United Kingdom ("CEMEX's UK Assets") for a total consideration of £178 million on a cash and debt free basis (the "Acquisition"). The combination of Breedon's and CEMEX's UK Assets will further enhance Breedon's position as a leading construction materials group in Great Britain and Ireland. The Acquisition is consistent with Breedon's strategy of acquiring earnings-enhancing aggregates-related businesses with strong potential for performance improvements and synergy benefits.

Highlights:

·; Breedon has agreed to acquire CEMEX's UK Assets for £155 million in cash together with the assumption of £23 million of lease liabilities. The cash consideration will be payable to the seller on completion1

·; CEMEX's UK Assets encompass approximately 100 active operations across six divisions located in Scotland, Wales, North-East England, Norfolk, the East Midlands, and Yorkshire

·; In the year ended 31 December 2018, CEMEX's UK Assets generated revenue of £178 million and EBITDA of £23 million

·; The cash consideration will be financed by existing £350 million revolving credit facility and drawdown of £80 million through exercise of accordion option

·; Group mineral reserves and resources will increase by approximately 170 million tonnes, enough to last over 27 years at current extraction rates

·; Breedon expects to achieve annual net pre-tax cost synergies of approximately £2 million by the third full year following completion

·; The Acquisition is expected to be accretive to Underlying EPS and FCF per share2,3 in the first full year following completion

·; Return on invested capital is forecast to cover the Group's weighted average cost of capital by the end of 2022

·; Breedon's pro forma net debt is expected to be approximately 2.4x Underlying EBITDA (2.2x on a covenant basis) at completion and to reduce below 1.0x during 2022

·; Completion is expected in the second quarter of 2020, subject to completion of a TUPE consultation process

Note: Financial information presented throughout this announcement has been prepared on a post-IFRS 16 basis.

1 Subject to completion adjustments.

2 This should not be construed as a profit forecast and should therefore not be interpreted to mean that the future earnings per share or cash flows of the enlarged Group will necessarily be greater than the historical published earnings per share or cash flows of the Breedon Group.

3 Free cash flow (FCF) per share is defined as cash from operations less dividends from associates, net capex, interest and tax, divided by the undiluted weighted average number of shares in issue.

Pat Ward, Breedon's Group Chief Executive, commented:

"This is a unique opportunity to extend our national network through a single value-enhancing transaction, substantially increasing our footprint in several regions of Great Britain where we are currently underrepresented and adding approximately 170 million tonnes of mineral reserves and resources. It also delivers a step-change in the development of our national asphalt strategy.

"There is potential to drive significant performance improvements across these new assets and they will also strengthen our platform for further organic growth and bolt-on acquisitions.

"In addition to the cost synergies we anticipate, we also expect the deal to be accretive to both earnings and free cash flow in the first full year, with a positive ongoing impact on the cash generation of the enlarged Group."

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Information on Breedon Group

Breedon Group plc is a leading construction materials group in Great Britain and Ireland. It operates two cement plants and an extensive network of quarries, asphalt plants and ready-mixed concrete plants, together with slate production, concrete and clay products manufacturing, contract surfacing and highway maintenance operations. Following the acquisition of CEMEX's UK Assets the Group will employ over 3,600 people and will have more than 1 billion tonnes of mineral reserves and resources. The Group's strategy is to continue growing through organic improvement and the acquisition of businesses in the heavyside construction materials market.

The information contained within this announcement is deemed by the Group to constitute inside information under the Market Abuse Regulations (EU) No. 596/2014.

Enquiries:

1. Introduction

Breedon announces that it has entered into a conditional agreement with CEMEX to acquire certain assets and operations in the United Kingdom for £155 million in cash together with the assumption of £23 million of lease liabilities. The combination of Breedon's and CEMEX's UK Assets will further enhance Breedon's position as a leading construction materials group in Great Britain and Ireland. The Acquisition is consistent with Breedon's strategy of acquiring earnings-enhancing aggregates-related businesses with strong potential for performance improvements and synergy benefits.

2. Information on CEMEX's UK Assets

CEMEX's UK Assets encompass approximately 100 active operations across six divisions located in Scotland, Wales, North-East England, Norfolk, the East Midlands, and Yorkshire. CEMEX's UK Assets employ over 650 people and have approximately 170 million tonnes of mineral reserves and resources.

In the year ended 31 December 2018, CEMEX's UK Assets sold 6.5 million tonnes of aggregates, 0.7 million tonnes of asphalt and 0.6 million cubic metres of ready-mixed concrete. In the same period, CEMEX's UK Assets generated revenue of £178 million, EBITDA of £23 million and EBIT of £11 million. As at 31 December 2018, the value of the assets being acquired was £182 million.

3. Strategic rationale for the Acquisition

Quality portfolio of assets

The acquisition of a collection of best-in-class assets significantly extends the Group's national network via a single transaction, strengthening Breedon's footprint in six key regions and adding approximately 170 million tonnes of mineral reserves and resources, bringing the enlarged Group's total mineral reserves and resources to more than 1 billion tonnes. A number of greenfield sites are included as part of the acquisition and offer further expansion potential.

Significant value creation potential

The Acquisition offers significant potential for value creation, given the high-quality assets being acquired at an attractive valuation and the significant EBITDA upside potential.

Breedon's management will also be able to leverage Breedon's existing network and expects to achieve annual net pre-tax cost synergies of approximately £2 million by the third full year following completion. One-off integration costs to achieve these savings are expected to be approximately £1 million.

Increased scale and enhanced market position

The Acquisition further enhances Breedon's position as a leading independent construction materials group in Great Britain and Ireland and substantially expands the Group's asphalt network, whilst increasing its complementary building products and contracting services businesses.

Further consolidation of Great Britain's heavyside construction materials sector

Breedon's acquisition of CEMEX's UK Assets enables the Group to bolt on assets in six regions of Great Britain and, in line with Breedon's strategy, further consolidates the heavyside construction materials industry. With the smaller end of the sector remaining highly fragmented, there remain further consolidation opportunities for the enlarged Group in the future.

4. Key terms of the Acquisition

Under the terms of the Business Purchase Agreement ("the BPA") relating to the Acquisition, Breedon Southern Limited, a wholly-owned subsidiary of Breedon, will acquire CEMEX's UK Assets for a total consideration of £178 million, including the assumption of £23 million of lease liabilities. The cash consideration of £155 million will be payable to the seller on completion.1 Completion is conditional on completion of a TUPE consultation process and is expected to take place in the second quarter of 2020.

As would be expected for a transaction of this nature, Breedon will be notifying the transaction to the UK Competition and Markets Authority ("CMA") for clearance. However, Breedon notes that completion is not conditional on conclusion of the CMA process.

The BPA also contains the customary warranties, covenants, undertakings and conditions attached to a transaction of this nature.

5. Financing for the Acquisition

The cash consideration will be financed by existing £350 million revolving credit facility and drawdown of £80 million through exercise of the accordion option agreed at the time of the Group's most recent refinancing.

6. Financial effects of the Acquisition

The Acquisition is expected to be accretive to Breedon's Underlying EPS and FCF per share2,3 in the first full year following completion. The Acquisition is also forecast to deliver a return on invested capital which covers the Group's cost of capital by the end of 2022.

Breedon's pro forma net debt is expected to be approximately 2.4x Underlying EBITDA (2.2x on a covenant basis) at completion. It is anticipated that leverage will reduce below 1.0x during 2022.

The enlarged Group's strong balance sheet and expected increased future cash flow will provide it with the financial flexibility to pursue further bolt-on acquisitions and growth opportunities.

7. Employees

Breedon recognises the significant talent and experience to be found among CEMEX's employees, who are expected to transfer to Breedon to support the ongoing growth and development of the business under Breedon's ownership.

8. Strategy of the enlarged Group

The strategy of the enlarged Group will remain consistent with Breedon's current strategy of pursuing a well-planned combination of organic growth and continuing consolidation of the heavyside construction materials industry in Great Britain and Ireland.

1 Subject to completion adjustments.

2 This should not be construed as a profit forecast and should therefore not be interpreted to mean that the future earnings per share or cash flows of the enlarged Group will necessarily be greater than the historical published earnings per share or cash flows of the Breedon Group.

3 Free cash flow (FCF) per share is defined as cash from operations less dividends from associates, net capex, interest and tax, divided by the undiluted weighted average number of shares in issue.