By Michael Erman
NEW YORK (Reuters) - Martin Marietta Materials Inc
The companies, which have been battered by the U.S. housing downturn in recent years, could cut as much as $250 million of costs each year, helping them maintain profitability as the U.S. economy founders, Martin Marietta said.
Martin Marietta would exchange 0.5 share of its stock for each Vulcan share. As of Friday's close, the bid was worth $36.69 a share, a 9 percent premium to Vulcan's closing price of $33.55.
Shares of both companies rose after the bid was announced on Monday, with Vulcan jumping 15 percent to $38.70, nearly 4 percent above the bid's value. Martin Marietta shares were up 1.7 percent at $74.61.
Martin Marietta Chief Executive Ward Nye said his company decided to go forward with the bid on its own because conversations with Vulcan were not going anywhere.
"At the end of the day, you feel like there's $2 billion there," Nye said in an interview, referring to the market value of the $200 million to $250 million in annual savings that he believes the companies could extract from the deal. "This is too much shareholder value ... to walk away from in good faith."
Vulcan and Martin Marietta have seen their earnings power sag since 2007, when the U.S. housing market collapsed. The construction materials companies also depend on highway funding and might benefit from consolidation, with little sign of a U.S. highway bill being passed in the near term.
"It makes sense strategically to combine the two companies," said Morningstar analyst Elizabeth Collins. "It will give them more scale and flexibility, and from Vulcan's shareholder perspective, it will give them a much stronger balance sheet."
Vulcan said it was reviewing the bid and would respond within 10 business days.
The companies have discussed the possibility of a deal since 2002, with talks intensifying over the last 18 months, Martin Marietta said in a filing with the U.S. Securities and Exchange Commission.
Vulcan broke off talks in recent months, according to the filing, as the two companies were unable to agree on terms for a deal or leadership roles. Martin Marietta also said that Vulcan Chief Executive Donald James did not believe that a combination would be able to generate cost savings of more than $50 million per year.
In its statement announcing the bid, Martin Marietta stressed that its operating and financial discipline could help improve Vulcan's balance sheet.
"We think the value creation is bringing our disciplined cost approach to it. Having the management team here that can really run that business with the best of the best from there is what creates the value," Nye said.
Under the terms of Martin Marietta's bid, Vulcan's shareholders would end up with more than 58 percent of the combined company. Martin Marietta proposed that Vulcan's James serve as chairman of the combined company, and that Nye serve as president and chief executive.
The company said the deal would also generate higher dividends for Vulcan shareholders.
Martin Marietta said it is launching its exchange offer for Vulcan shares and plans to submit five nominees to Vulcan's board of directors for election at the company's 2012 annual meeting. The company's board currently has 11 directors.
Martin Marietta has also filed lawsuits in Delaware and New Jersey in an attempt to bolster its bid.
Deutsche Bank and J.P. Morgan are advising Martin Marietta on its bid. Goldman Sachs is advising Vulcan.
Investors had recently tagged Vulcan as a possible takeover target, options analysts said.
On December 6, there was speculative call buying on Vulcan Materials as more than 16,000 contracts traded compared to typical call volume of 2,000 contracts over the past month, said WhatsTrading.com options strategist Frederic Ruffy said.
"Takeover chatter drove the call action on that day," Ruffy said. The call volume was eight times the average daily turnover with players scooping up December $30, $35, $36 strike calls as well as the January $40 strike calls. The February $37 calls were also active. But the December $35 calls were the busiest option, Ruffy said.
Investors often turn to equity call options, which convey the right to buy shares at a fixed price any time up until expiration, hoping to profit on a stock price rise.
The U.S. Securities and Exchange Commission, which looks into unusual stock and option activity, declined to comment.
(Reporting by Michael Erman in New York, Divya Sharma in Bangalore and Doris Frankel in Chicago, editing by Gerald E. McCormick, John Wallace andSriraj Kalluvila and Carol Bishopric)