2.

The “independent expert” substantially overstates value and admits its conclusions may be unreliable

 

	l	Grant Samuel’s value estimate implies unrealistic multiples, out of line with historical comparables
	l	Grant Samuel’s value estimate implies unjustified premiums
	l	Grant Samuel admits its value estimate is based on assumptions that are “difficult to predict with any degree of reliability” and that its conclusions may therefore be unreliable

 

	3.	CEMEX has offered a full and fair value for Rinker
	l	CEMEX’s Offer delivers an above-average multiple and a full premium for control
	l	The flaws in Grant Samuel’s work result in substantial value overstatement and the correction of those flaws would result in a materially lower value estimate
	l	In the absence of the Offer, Rinker’s share price would most likely fall to pre-bid levels

 

 

 

 

1	Rinker’s target’s statement lacks substance

 

	A.	Rinker provides no articulation of its forecasts or strategy to deliver standalone value in the absence of CEMEX’s Offer
	l	Grant Samuel’s valuation estimate has been prepared with reliance on Rinker’s 2007 forecast and five year plan (through to the year ending 31 March 2012), which have not been reviewed by the Directors of Rinker, and Grant Samuel’s own modelling assumptions for a further 10 years1.
	l	However, the financial projections on which this valuation is based are not disclosed2. As a result, there is insufficient information to provide shareholders with confidence of a strong, independent future.
	l	Rinker’s shareholders should be concerned by Rinker’s failure to disclose any detailed forecasts, despite its financial year end being less than four months away.
	l	As a result, Rinker is asking shareholders to reject CEMEX’s Offer on a “trust me” basis, without an indication as to how superior standalone value would be created in the absence of the Offer.

 

 

 

 

 

 

 

 

1 Grant Samuel, page 6. 2 Grant Samuel, page 5.

 

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1	Rinker’s target’s statement lacks substance

 

	B.	Rinker relies on its historical performance, but fails to highlight its recent poor performance
	l	Rinker’s strong historical performance3, which is highlighted as a key theme inRinker’s target’s statement, is misleading as presented and is irrelevant in an assessment of CEMEX’s Offer.
	l	Rinker’s strong historical performance has been largely due to the strength of the Florida housing market, as illustrated by the graph below, which shows the historically high 84% correlation between Rinker’s share price and the level of Florida building permits.

 

 

 

 

 

 

 

3 Rinker target’s statement, page 13.

 

 

 

 

4

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5

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6

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⁴ US Census Bureau (November 2006).

⁵ Based on the last traded price of Rinker Shares during normal trading on ASX on 27 October 2006 of A$13.39.

⁶ Grant Samuel, page 39.

 

 

 

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	A.	Grant Samuel’s value estimate implies unrealistic multiples, out of line with historical comparables
	l	Grant Samuel’s value estimate implies an excessive EV / LTM EBITDA7 multiple for Rinker Materials of 10.5-11.6x8, which Grant Samuel seeks to justify with reference to precedent transaction multiples.
	l	Grant Samuel references 30 precedent transactions, of which more than 70% were executed at an EV / LTM EBITDA multiple lower than CEMEX’s Offer multiple for Rinker of 8.8x9, and for which the average transaction multiple was 8.0x10.
	l	As shown on the graph below, none of the precedent transaction multiples selected by Grant Samuel fall within Grant Samuel’s value estimate range for Rinker.

 

 

 

7	EV / LTM EBITDA is the enterprise value of the relevant company divided by its earnings before net interest, income tax, depreciation and amortisation.
8	Grant Samuel, page 6.
9	CEMEX’s bid for Rinker equates to an EV / LTM EBITDA multiple of 8.8x. This multiple has been updated from the multiple disclosed in the bidder’s statement, to reflect Rinker’s trading performance to, and capital structure as at, 30 September 2006, which was not previously available.
10	Grant Samuel, Appendix 3.

 

 

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	l	Grant Samuel’s rationale for this inconsistency is that the oldest and most expensive outlier of these transactions (Vulcan/CalMat) is the most direct comparable for Rinker Materials11. However, Grant Samuel makes several errors in its reliance on this rationale:

 

		l	Grant Samuel implies that CalMat’s high multiple reflected the fact that it was “primarily an aggregates company”12. In contrast, Rinker’s US exposure to aggregates is only 19%13;
		l	Grant Samuel claims that this transaction was executed at a multiple of 11.9x. Rinker itself has stated that this transaction was executed at a multiple of 9.1x14, broadly in line with CEMEX’s offer multiple; and
		l	Grant Samuel dismisses all other precedent transactions (a number of which are excellent comparables for Rinker) with inappropriately selective and inaccurate one-sided reasons15.

 

	l	Grant Samuel states that “[l]ower earnings multiples are normally seen when earnings are at a peak”16. Grant Samuel acknowledges that Rinker Materials is near its peak cycle earnings (it states that earnings are only 3-6 months past their peak17). However, as shown above, Grant Samuel has applied an earnings multiple that is at a substantial premium to relevant benchmarks. This is an inconsistent application of the earnings capitalisation methodology.
	l	Further, in its previous work on Pioneer International Limited (which it selectively cites for a different purpose in its report on Rinker18), Grant Samuel stated:
		“The heavy building materials industry is mature, with no effective product differentiation. Demand is relatively price inelastic and demand growth is generally limited to overall economic growth … Accordingly, earnings multiples across the industry are low and companies typically trade at significant discounts to overall market averages”
		- Grant Samuel report dated 25 January 2000, page 61
		Grant Samuel’s application of an aggressive premium multiple to Rinker is a direct contradiction to this.

 

 

11	Grant Samuel, page 64.
12	Grant Samuel, page 65.
13	Rinker Target’s Statement, page 12.
14	Presentation by Rinker CEO lodged with ASX on 27 September 2006.
15	Grant Samuel, pages 64-65.
16	Grant Samuel, page 62.
17	Grant Samuel, page 67.
18	Grant Samuel, page 65.

 

 

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2

The “independent expert” substantially overstates value and admits its conclusions may be unreliable

 

 

 

	B.	Grant Samuel’s value estimate implies unjustified premiums
	l	Grant Samuel acknowledges that takeover premiums in Australia typically range between 20-35%19.
	l	CEMEX’s Offer price of US$13.00 represented a 27% premium20 at the time of announcement, which is around the midpoint of the typical range.
	l	Despite this, Grant Samuel asserts that the premium of 54-72%21, which is implied by its valuation estimate, is appropriate.

 

l

Grant Samuel’s rationale for this position is based on the proposition that Rinker’s pre-bid share price should have been higher, resulting in a lower implied premium. This proposition is based on three flawed contentions22:

 

¹⁹ Grant Samuel, page 75.

²⁰ CEMEX’s Bidder’s Statement, page 6. Note that, based on the Reserve Bank mid point exchange rate of 0.7850 at 4pm on 1 December 2006, this premium would fall to 23.7% .

²¹ Grant Samuel calculates the premium relative to the previous close to be 48-65% (Grant Samuel, page 75), whereas the correct premium range using an unaffected pre-bid share price of A$13.39 (based on the last traded price of Rinker shares during normal trading on ASX prior to announcement of the Offer) is 54-72%.

²² Grant Samuel, page 8.

 

 

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2

The “independent expert” substantially overstates value and admits its conclusions may be unreliable

 

 

 

	C.	Grant Samuel admits its value estimate is based on assumptions that are “diffi cult to predict with any degree of reliability” and that its conclusions may therefore be unreliable
	l	Grant Samuel’s work contains numerous statements warning investors that itsconclusions may be unreliable.
	l	Grant Samuel states that its valuation is“estimated” and “high level” only and is a “subjective judgement”
		- Grant Samuel, pages 2, 6 and 58
	l	Grant Samuel states that there is significant potential for an erroneous conclusion by adopting its primary discounted cash flow methodology:
		“The arbitrary assumptions that need to be made and the width of any value range mean the results are often not meaningful or reliable”
		- Grant Samuel, page 56

 

	l	Grant Samuel states that its valuation estimate is based on assumptions around which there is considerable uncertainty:
		“[T]here is considerable uncertainty around some of the assumptions in the model”
		- Grant Samuel, page 60

 

	l	Grant Samuel also states that its valuation estimate is based on assumptions that are incapable of being predicted with accuracy, especially beyond a short term horizon:
		“The net present value is typically extremely sensitive to relatively small changes in underlying assumptions, few of which are capable of being predicted with accuracy, particularly beyond the first two or three years”
		- Grant Samuel, page 56
		Despite this, Grant Samuel uses a 15 year model, containing Grant Samuel’s own arbitrary assumptions for the last 10 years.
	l	Grant Samuel states that the outlook for residential construction over the short to medium term is the primary source of divergent views on valuation. It states that there is no right answer and that it is not useful to rely on a single view:
		“There are widely diverging views about these issues … there is no reliable way of determining the “right” forecast or even the “better” view at this point in time and … it is not useful to rely on a single view”
		- Grant Samuel, page 4
		Despite this, Grant Samuel does rely on a single view - the view of Rinker management.

 

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3

CEMEX has offered a full and fair value for Rinker

 

 

	l	As outlined in its bidder’s statement, CEMEX has offered a full and fair value for Rinker.
	l	The flaws in Grant Samuel’s work result in substantial value overstatement.
	l	There is no information in Rinker’s target’s statement or Grant Samuel’s work that presents a realistic argument to suggest CEMEX’s Offer is not fair and reasonable.
	l	Grant Samuel notes that if CEMEX’s Offer lapses, it is likely that Rinker’s share price would fall back towards the pre-bid levels. The volume weighted average pre-bid level for the three months prior to announcement of the Offer was A$13.47.
		“Equally, it needs to be recognised that rejection of the CEMEX Offer carries risks. If the CEMEX Offer lapses and no counter bidder emerges, it is likely that the Rinker share price will fall back towards pre-bid levels”
		- Grant Samuel, page 9

	l	This could occur, for example, if CEMEX’s Offer conditions were not satisfied and if CEMEX decided to pursue an alternative strategy.

 

 

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