Building on firm ground

CRH ANALYSIS:UNLESS YOU'RE a geologist or a football hooligan, stones probably don't hold much attraction for you. But if you're in - or near - a building as you read this, have a look at it. There's a strong chance that there is some element of stone, or some other material that had to be dug out of the ground, in its structure.

Bricks, cement, precast concrete and a range of other building materials all include ingredients that have to be quarried, dug up, or in the case of steel, mined. The same goes for roads, bridges or any other structure you'd care to mention.

It's mundane stuff, but it is partly the key to the success and underlying wealth of Ireland's biggest company. CRH is once again leading the Top 1,000 companies courtesy of last year's near €21 billion turnover. What was once Cement Roadstone Holdings, a small business in real terms that owned what was the Republic's only cement producer, has become CRH, a supplier, producer and distributor of building materials with a global reach.

With headquarters in Clondalkin in Dublin, its shares are traded on the Irish stock market (where it is one of the few companies with a weighting to rival the big banks) but it has businesses in three continents. Materials supplied by its subsidiaries have been used in Alpine railway tunnels, on interstate highways in the US and in the resurfacing and upgrading of the George Washington Bridge that links Manhattan with New Jersey.

Being an international operator in this business does not mean that you are producing cement in Ireland and exporting it to the US, or vice versa. In fact, with a lot of these products, you have to have a presence in the markets to which you are trying to sell.

At the same time, their value relative to their size is low, so it's not generally viable to ship them over long distances, or half way across the world. So it is better to locate as close as possible to your market. This has partly shaped the way in which CRH has expanded. It has gone into each of its territories and bought existing businesses there, and simply absorbed them into the overall group.

Its biggest purchase to date, the APAC group, for which it paid over €1 billion, is a good example of how this works. The company has operations throughout the southern and south western US, a region where CRH's Americas materials division was looking to build a presence.

APAC supplies asphalt, used for building highways, one of the sectors on which CRH is focused. Thus the Irish group decided it was a good fit, and bought it. The parts of it that it regarded as surplus to requirements, it sold.

John Sheehan, analyst with stockbrokers, NCB, says CRH has proved particularly good at managing the risks associated with acquiring other businesses and has never plunged into a big deal. "They've been very disciplined," he says.

"APAC was the biggest deal they have done, and they've always tended to go with a steady approach."

It's an approach that has worked. This year is the 30th anniversary of its first foray outside Ireland and into the US. In 1978, the company bought Amcor, a Utah-based building materials supplier. At that point, 95 per cent of CRH's business was in Ireland and just five per cent was overseas. Now that situation has turned around, with this country accounting for just five per cent of its revenues and profit in Ireland and 95 per cent from the rest of the world. These are split roughly 50/50 between the US and Europe.

Along the way, it has picked up considerable assets. Sheehan points out that its reserves - the stone and other basic materials sitting in its quarries - will last for another 50 years. "That is a finite resource," he says.

While there is a good deal more stone in the world than oil, Sheehan explains that it's not always easy to get at. Quarries have to be located close enough to urban areas, where most of the demand is, but not so close as to impinge on them. But he points out that, if you have the reserves in the right places, it gives you some influence over prices.

The reserves form part of the backbone of CRH's materials division. This accounts for over 40 per cent of its revenues, and consists largely of the physically quarried materials - known as aggregates - cement, stone and the other constituent parts of building products.

The next division is products, made up of anything from bricks, to glass to steel. These businesses turn the raw materials into building components. The final arm is distribution, which includes a range of builders' merchants and DIY retailers. They sell and distribute the products to the end user.

A key feature of the group is the fact that it is almost constantly acquiring businesses for each of its divisions. These are mainly what it describes as "bolt-ons", that is, far smaller operations than the parent that slot into existing activities.

Bedding down new additions to an ongoing business is not always easy, and doing it on an ongoing basis is particularly difficult. The group itself says that managing this process is one of its strengths. It usually keeps on the local managers, but works closely with them.

In addition, insiders say its own executives pay close attention to what goes on at all levels of the group. "They're real detail guys, they drill down into the minutae of everything," one former employee says.

It has had a few advantages. At the very beginning, it was the only business in the Republic with a licence to produce cement, a situation that persisted to 2000, when the Oireachtais removed the outdated law giving it that privilege. That at least gave it some guarantees when it began its international expansion, although it became less and less relevant very quickly.

Last year, it came close to hitting a new benchmark. A group of businesses in the US, belonging to one of its competitors, Mexican giant, Cemex, came on the market as a result of a ruling by the Federal competition authority.

Collectively they had a price tag of around €3 billion, and CRH's indicative bid put it in pole position to buy them. They would have been the biggest acquisition in its history, far above the scale of anything it has done before. However, the talks collapsed after the two failed to agree on a final price.

That said, it looks like it is only a matter of time before CRH passes that milestone.