Antitrust concerns played a major role in the decision by executives of Vulcan Materials Co. to reject Martin Marietta Materials Inc.'s overture to buy the company, according to a Securities and Exchange Commission filing by Vulcan on Dec. 22.
Executives from the two companies began discussing a potential merger in April 2010, and Vulcan submitted its version of those talks in an SEC filing that addressed the events leading up to last week's hostile offer. Vulcan's version of events contradicts that of Martin, which continues to insist that the deal would not face any insurmountable obstacles winning approval from the Department of Justice. A previous filing by Martin states that the legal teams of both companies "did not identify any significant impediments to a business combination transaction."
In Vulcan's version of events, however, competitive concerns threw a wrench into the merger talks right away. The country's two largest construction materials businesses have overlapping operations in 11 states.
Martin officials have insisted that although divestitures are likely to be required, they are not likely to be so onerous that they cannot be complied with on a timetable set by the DOJ. In a conference call with analysts when the hostile bid was announced, Martin CEO Ward Nye said, "As a practical matter, these companies are complementary. They don't have a lot of overlapping sites and we believe that should work very, very effectively." Later in the call he said, "We clearly looked at regulatory hurdles as we've come into this transaction and we're confident that we can accommodate whatever the regulatory needs are to take this forward."
According to Vulcan, Nye approached the company about a possible merger shortly after taking the helm of Martin. Vulcan CEO and chairman Donald James subsequently met Nye in Washington to discuss various issues related to a potential combination, including the antitrust concerns likely to arise due to the overlaps.
According to Vulcan, the two men discussed how difficult it might be to sell a large quantity of assets in the then-depressed construction market on the timeline likely to be mandated by the DOJ. They also discussed concerns about how forced divestiture of assets could lead to sales at unattractive valuations and that the cash tax costs of the divestitures and the loss of quality assets to competitors would reduce the value of the combined entity and cut cash margins going forward.
James recalled Vulcan's experience in complying with a DOJ divestiture order regarding the company's 2007 acquisition of Florida Rock Industries Inc.: The DOJ required the sale of eight quarries and a distribution center. James maintained that a transaction between Martin and Vulcan was unlikely to receive a less rigorous DOJ review. He also noted that both the DOJ and the Federal Trade Commission now severely limit "hold separate" agreements that allow acquirers to delay divestitures to avoid a firesale price.
Although at James' suggestion the companies explored spinning off divested assets in transactions that would be tax-free to Vulcan's and Martin's existing shareholders, a working group that included the general counsels of both companies and the company's outside antitrust advisers later concluded that a spinoff wasn't feasible and any assets to be divested would have to be sold in a taxable transaction in a short time frame mandated by the government.
The parties continued to talk and on May 24, 2010, Martin's antitrust attorneys from McDermott Will & Emery LLP and Vulcan's from Wachtell, Lipton, Rosen & Katz met in New York to analyze the potential antitrust issues at the local market, quarry, pit and yard level. The attorneys shared their clients' proprietary and competitively sensitive data to arrive at a joint, detailed analysis of the antitrust risk presented by a merger.
The McDermott team representing Martin forwarded proposed lists of properties at risk of having to be divested to Wachtell shortly after the meeting, according to Vulcan's filing.
On June 4, 2010, McDermott and Wach-
tell agreed on a final list of properties at high risk of divestiture and forwarded the list to their respective clients.
Nye and James resumed their talks at a June 16, 2010, meeting, but James advised Nye that unless there were substantial achievable, tangible synergies that would offset the impact of mandated divestitures, Vulcan would not enter a deal. James also expressed concern about the potential tax consequences of such sales.
The discussions continued for a while, but more than a year later, on July 8, 2011, at a regularly scheduled meeting of the Vulcan board, James reported that the discussions with Martin had ceased because the companies were unable to agree on a price that accurately reflected the estimated synergies and the antitrust costs.
Martin commenced its unsolicited offer and initiated litigation proceedings against Vulcan in Delaware and New Jersey five months later.
Vulcan's board urged its shareholders not to accept the offer, citing "value-destructive divestitures" that would "harm the financial results of a combined company." Vulcan's board predicted the DOJ "will insist on the divestiture of high-quality Vulcan assets located in key markets, likely at unattractive valuations due to market conditions and being implemented on a compressed sale timeline, resulting in reduced cash margins for the combined company and significant cash tax costs."
Vulcan dismissed Martin's "claims of certainty that they will find willing buyers." The board said the required divestitures, "implemented on a tight timeframe in the midst of an economic downturn and trough period for the industry, are likely to yield unattractive sales proceeds, as well as result in significant cash tax costs in light of the low tax basis in the assets."
Vulcan also noted that the terms of Martin's offer give the buyer the right to terminate the offer if any governmental authority seeks to require disposition of any assets. "Martin Marietta has not made the requisite assurances that it will take the required steps to achieve the necessary antitrust approvals and offered no termination fees in the event that the offer fails to close for this reason," Vulcan said. "This exposes Vulcan shareholders to the significant risk that Martin Marietta will walk away from the transaction after putting Vulcan and its shareholders through a lengthy and expensive period of uncertainty and the accompanying lost opportunities and reputational harm."
Martin's terms, Vulcan said, give it an unconditional right to back out of the deal because a divestiture order is all but certain. Martin Marietta is fully aware of this fact, as it was the divestiture buyer of assets that the DOJ recently prohibited from being combined with Vulcan assets in connection with Vulcan's Florida Rock acquisition."