BUS498-Case Study

Read the case study and create a slide and script for section C

A. INTRODUCTION

Statement of Purpose – state the purpose of your project and define the industry. Let the reader know in advance the specific issue you will address as well as what issues you will not address and why? A little bit of the history of your firm and what path it has traveled to be where it is today.

B. EXTERNAL ANALYSIS TO IDENTIFY OPPORTUNITIES & THREATS

See the book for relevant chapters and my note on a good SWOT to be applied to the firm report for industry report focus on chapter 3 from Rothaermel book 3rd ed.

Perform an audit of the trends in the industry from the focal Firm’s (firm that you have chosen) perspective. The trends are neutral until you label them positive or negative depending upon your focal firm. Thus, you must be specific to identify both opportunities and threats (this must include an analysis of essential external forces and trends, including the industry and competitors). Makes sure you also look at the general environment discussion (task environment and societal environment: – PESTEL framework). You may use Porter’s five force analysis if it is appropriate for your analysis. Eventually, you must inform what are the critical factors in this industry. What makes this industry either attractive or unattractive? What is the future of this industry? What about competitive analysis or Strategic Group analysis? Remember to use many of the data base sources that are provided in a separate document.

C. STRATEGY ANALYSIS AND CHOICE

Identify and revise mission statement of the firm, if necessary. Establish Long Term Objectives, Generate alternative strategies, Choose courses of action and justify choices. You may use any other analytical tools, discussed in the classroom depending upon your needs for analysis. (Chapter 4 and chapter 6 minimum)

D. STRATEGY IMPLEMENTATION(Revisit chapters on this issue, chapter 10 and 11)

The key issue is a fit between external factors and internal factors. This would create answers to the implementation questions such as; what should be done to foster successful implementation of your recommended strategies? Include a discussion of capital requirements and sources of capital. In addition, you must bring the human capital aspect in your strategy implementation process.

E. EVALUATION & CONTROL

Develop a three (3) year PRO FORMA Income Statement with remarks column that provides assumptions about your strategy, cost of resources and future of the industry. (Chapter 5 minimum)

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9-724-437
MARCH 29, 2024
RAMON CASADESUS-MASANELL
DAVID M. WAGNER
OLIVER GASSMANN
JORDAN MITCHELL
RHI Magnesita (A): Brick by Brick – Organic
Growth or Another Major Merger?
In mid-April 2017, Stefan Borgas, newly appointed CEO 1 of the yet-to-be merged refractory
company RHI Magnesita was musing on an electrifying possibility – would it make sense to attempt
another major merger? Even though the ink was still drying on the massive €1,035 million tie-up
between Austrian-based RHI and Brazil’s Magnesita, he let his mind wander about the possibilities of
acquiring the UK giant Vesuvius, who for decades had held the number one position in refractories.
Often labelled a “fireproof materials firm,” 2 RHI supplied heat-resistant protection materials such
as brick linings for the inside of kilns used in energy intensive manufacturing industries. In October
2016, RHI had made the bold move to merge with Magnesita in an effort to address overcapacity,
realize cost synergies and take advantage of both companies’ complementary product lines and
geographic footprints (see Exhibit 1 for both companies’ pre-merger financial statements). 3 Even
though the combined company would become the largest refractory player in the world, a major
threat was looming – the Chinese government had announced its intentions to consolidate 80 percent
of the thousands of small local refractory players to create a behemoth: the China Magnesite Mining
Co. with 51 percent state ownership.
Stefan’s mind quickly turned to when RHI was a stand-alone Austrian firm and recalled the
strategic planning work that he and his executives had conducted on identifying organic growth
possibilities in a market that had been relatively stagnant for 20 years. RHI’s management team had
worked diligently to identify “Grow the Core” initiatives across its key industry segments forecasting
€250 to €500 million in top-line growth within five years as well as eight additional organic “Close to
Core” opportunities to add another €100 to €200 million in revenues in the same time horizon.
Should he focus the company on harnessing the synergies of the RHI-Magnesita merger while
pursuing the organic growth opportunities? If so, how could he prioritize the eight “Close to Core”
ideas? Fundamentally, were the benefits in sales and EBIT lift from the initiatives worth the
management attention and financial investment? Or, would it be a much bolder move to create an
undisputed colossus by merging with Vesuvius?
HBS Professor Ramon Casadesus-Masanell, Doctoral Student David M. Wagner (University of St. Gallen), Professor Oliver Gassmann
(University of St. Gallen), and Research Associate Jordan Mitchell prepared this case. It was reviewed and approved before publication by a
company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are
developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
Copyright © 2024 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
The Global Refractory Industry
The refractory industry was valued at approximately €20 billion in 2016 and encompassed highgrade products, systems and services that protected the inside of industrial equipment a used in hightemperature industrial processes exceeding 1,200 degrees Celsius [°C] (~2,200 degrees Fahrenheit
[°F]). The main customers were producers of steel, non-ferrous metals (aluminum, copper, lead, and
other metals), cement, glass, energy, and chemicals.
The five broad categories of offerings in the industry were: formed refractories; unformed
refractories; functional products; machinery and equipment; and, services and software. Formed
refractory products ranged an extensive gambit, however, the most common type was heat-resistant
bricks that were used as linings for the insides of kilns, furnaces, ladles and a wide variety of other
equipment. 4 Unformed products, often referred to as “monolithics,” typically came in mixes and
could be applied to the inside of equipment and hardened in place. 5 Functional products included
slide gate plates, nozzles, tube changers and stoppers that were used to regulate and control the
movement of a liquid material such as molten metal. b Additionally, the industry offered machinery
and equipment such as robotics for refractory replacement and services and software that were used
to help customers work safely with materials in high-heat. Out of the 35 million tons of global
refractory products, the breakdown by mineral type was: manufactured “ceramics” refractory clays
(~46 percent), magnesia (~26 percent), recycled refractory applications (~8 percent), calcined bauxite
(~7 percent), brown fused alumina (~7 percent), and dolomite (~4 percent). 6 See Exhibit 2 for
examples of refractory products and applications.
In order to understand refractories, it was helpful to consider the basic flow of a major industrial
process. For example, steel was made by processing iron ore, coke (from coal), scrap, and other
materials in different furnaces at high temperatures. 7 The liquid steel was transferred to a ladle for
secondary treatment before being passed through a tundish (to regulate the flow) and finally cast into
a mold to solidify. 8 Refractory linings and functional products were used throughout the entire
process inside of each piece of equipment. 9 Furthermore, in downstream facilities like foundries
(where the metal was formed into use for other products such as automotive parts, pipes, machinery,
amongst many others), refractories and functional products were adapted for the types of equipment
and differences in temperature ranges. The World Refractory Association underscored: “Refractories
play the triple role of providing mechanical strength, protection against corrosion and thermal
insulation.” 10 Another industry expert summed up the importance of the products succinctly by
saying: “Without refractories, there would be no steel, non-ferrous metals, glass, and cement
production.” 11
a Refractory products that offered a protective lining were applied to the inside of various equipment types such as furnaces,
kilns, ladles, crucibles, tundishes, incinerators, boilers, heaters, reactors, pipelines and other vessels. Typically, unique
refractory solutions were needed for each type of equipment type.
b There are a number of functional products used in industrial applications, but many are outside of the scope of refractories.
For example, flow control products that help manage the speed, direction and distribution of liquid metals during production
include valves, pumps, meters and regulators. Typically, refractory producers dealt with a specific sub-set of flow control
products like slide gates, nozzles, tube changers and stoppers.
2
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
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Magnesia
The main material used in the refractory industry was magnesia c (MgO), a compound of the
chemical element magnesium (Mg). The majority of magnesia was produced from “magnesite,” also
known as magnesium carbonate (MgCO3). Magnesite existed in its natural form or in other minerals
such as dolomite (CaMg(CO3)2) throughout the world and was mined in order to produce magnesia.
Magnesia could also be produced synthetically using salt-water brines. Approximately 89 percent of
magnesia was derived from mined magnesite versus 11 percent produced synthetically. 12 According
to metallurgists, magnesia was well-suited to refractory products “due to its high melting point, high
thermal shock, and excellent [chemical attack] resistance.” 13
Value Chain
R&D Major refractory companies emphasized innovation and continuous improvement of
products, processes and applications and worked closely with customers to look for revenue
enhancement and cost reductions. One example of a recent innovation involved computer modelling
to increase the longevity of refractory bricks to boost productivity for steel manufacturers. 14 See
Exhibit 3 for an illustration of the value chain.
Mining Globally, natural raw magnesite reserves were estimated at 8.5 billion tons, with
approximately 65 percent of deposits centralized in three countries: Russia (27 percent), China (20
percent) and North Korea (18 percent). 15 In 2015, magnesite production capacity was 27.7 million tons
with even greater concentration by country: China (69 percent), Turkey (10 percent) and Russia (5
percent). 16 Roughly 80 percent of global magnesite production was used in the refractory industry. 17
The top three exporters of magnesite were: China (42 percent of exports), the Netherlands (8 percent)
and Turkey (6 percent). 18 Industry observers noted that tight Chinese magnesite supply capacity
throughout 2015 and 2016 had disrupted the global supply chain and as such, other exporters such as
the Netherlands, Turkey, Australia and Brazil aimed to increase exports to meet demand. 19 The
naturally-mined magnesite supply market was highly fragmented and competitive. Hundreds of
family-owned small and medium sized businesses operated mines and served regional markets.
Aside from China, there were typically one to two major magnesite miners per country that operated
as sub-units of larger integrated groups. 20 Few of the major refractory players pursued vertical
integration in an effort to secure the supply of magnesite. 21 European magnesia producers had
experienced a margin decline from approximately 17 percent in 2013 to just over 10 percent in 2016. 22
See Exhibit 4 for magnesite reserves and production worldwide.
Raw Material Production Magnesite or other minerals were crushed, ground and depending on
the type of final refractory product, calcined and dried. For certain products, the minerals were fired
in rotary kilns in order to produce varying levels of purity such as dead burned magnesia (90-97.5
percent purity and produced at 1,500–2,300 °C; 2700–4100 °F) and fused magnesia (96-98 percent
purity produced at 2,800–3,000 °C; 5,000–5,500°F). Fused magnesia was created directly from
magnesite or caustic calcined magnesia. 23 In some situations, the crushed minerals were mixed with
other compounds and either sent to production plants for further processing or shipped as a
monolithic mix. 24 Raw material production relied on energy sources such as natural gas, electricity,
coal and oil.
c Magnesium oxide, or magnesia (MgO) was derived from two primary sources: Magnesite (MgCO3) naturally found in
specific mines (also from other minerals such as serpentinite, dolomite, huntite, bischofite) known as “natural magnesia” and
from sea water and magnesium-rich brines known as “synthetic” magnesia (MgO) converted from magnesite.
3
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Final Production Depending on the buyer’s preferences and industry application, the minerals
needed to be formed, fired and processed. Bricks or shapes were formed by a 2,000-ton press and
then given either heat treatment of 350°C (~660°F) or fired in long tunnel kilns at 1,800°C (~3,200°F)
for up to three days using energy sources such as natural gas, electricity, coal and oil. The steel
industry primarily used unfired, heat-treated products, whereas non-ferrous metals, cement, glass,
and energy industries mainly consumed fired products.
Services The final step involved delivering and installing the refractory bricks and linings if
contracted by the customer. Larger refractories companies offered additional services for monitoring
and replacements. 25
Market Landscape and Key Market Players
The global refractory market was highly fragmented and split between a few prominent
international players and many smaller regional companies (see Exhibit 5 for more information).
Combined, the top 11 players shared ~54 percent of the €20 billion refractory market, while the
remainder comprised thousands of smaller firms spread throughout the world. The top five
companies in terms of market share were: 26
1.
Vesuvius Plc (UK) – 9 percent market share: Dating back to 1704, Vesuvius posted revenues
of £1,401.4 million (€1.72 billion) and operating profit of £92.9 million (€114 million) in 2016. 27
It operated in two primary business segments: Steel (including Steel Flow Control and
Advanced Refractories accounting for £942 million in revenue) and Foundry. 28 The company
had 10,840 employees spanning 66 production sites and 17 research and development (R&D)
centers in 38 countries. 29
2.
RHI AG (Austria) – 9 percent market share: With roots back to 1834, RHI’s revenues were
€1.65 billion with operating earnings before interest and tax (EBIT) at €123.2 million in 2016. 30
The company was divided into three segments: Steel, Industrial, and Raw Material. 31 RHI
had 30 production sites, 70 sales offices and operated five mines with its 7,678 employees. 32
3.
Magnesita Refratários S.A. (Brazil) – 4.5 percent market share: Founded in 1939, revenues
summed to BRL 3,393.1 million (€883.9 million) with EBIT at BRL 464.5 million (€121 million)
in 2016. 33 Magnesita was divided into three business lines: Refractory Products, Minerals and
Services. 34 The company focused on manufacturing refractory materials, providing refractory
assembly and maintenance services and trading industrial minerals. The company’s 7,165
employees worked at 27 production facilities and two mines in eight countries. 35
4.
Imerys S.A. (France) – 4 percent market share: Established in 1880, Imerys was organized
into four business lines: Energy Solutions, Filtration, Ceramic Materials, and High Resistance
Minerals (including Refractory and Fused Minerals accounting for revenues of €597.8 million
and operating income of €78 million in 2016). 36 Total consolidated company revenues topped
€4,165.2 million with operating income at €493.3 million in 2016. 37 Company operations
spanned 50 countries and 258 industrial sites spread between Western Europe (43 percent of
revenues), emerging countries (27 percent), North America (25 percent), and Japan &
Australia (5 percent). 38
5.
Krosaki Harima (Japan) – 4 percent market share: Founded in 1918, Krosaki Harima posted
revenues of ¥115.1 billion (€868.9 million) and operating income of ¥5.797 billion (€43.8
million) in 2016. 39 The company’s refractory business accounted for 80 percent of overall
4
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
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revenues. 40 Other segments included furnaces, ceramics, landscape materials, and real
estate. 41 The company had 4,365 employees at 10 production facilities and 17 offices in
Japan. 42
Traditionally, small-scale producers were able to enter into the industry as long as they had access
to high-intensity energy sources and an experienced salesforce. To produce basic refractories,
magnesia could be purchased as a commodity while know-how and equipment were moderately
specialized. However, major players looked to differentiate through product breadth, geographic
footprint, relationship-selling, services, and innovation via effective R&D. In some jurisdictions such
as the European Union, environmental regulations were becoming stricter putting greater pressure
on industry compliance.
M&A Activity The most prominent players in the industry had pursued acquisitions in order to
grow (see the “Vesuvius” section of this case for their M&A activity). Some recent examples of M&A
activity included Imerys’ acquisitions of Greece’s S&B Industrial Minerals for €558 million in 2014,
France’s Kerneos for approximately €880 million in 2016, 43 and Alabama-based SPAR in 2016, a
monolithic refractory producer. 44 Krosaki Harima had also consolidated its position by making one
of its indirect subsidiaries, TRL Asia in India, a 100 percent directly owned holding “to ensure sales
expansion in the world [refractory] markets.” 45 See Exhibit 6 for M&A growth transactions in the
refractory industry.
Competitors from China and India China and India had both emerged as increasing global forces
in the refractory industry due in part to the strength of the established steel industries in both
countries. Although the Chinese market was highly fragmented, the Chinese government had
announced plans to establish the China Magnesite Mining Co. with 51 percent state ownership to
consolidate the market and control 80 percent of national refractory production including backwards
integration into magnesia mines. 46 A few of the larger players such as Haicheng Linli Mining (owned
by Puyang Refractories Group estimated at €318.3 million in revenues 47) and Beijing LIRR High
Temperature Materials (€252 million in revenues 48) had confirmed they would be merging into the
new company. 49 Other notable competitors in the region included China’s Qinghua Refractories
(undisclosed revenues) as well as India’s Carborundum Universal (€295 million) and India’s Dalmia
Bharat (€252 million). 50
Customers
The top five industries that bought refractory products were: steel (60 percent), energy and
chemicals (~15 percent), non-ferrous metals (~10 percent), cement (8 percent) and glass (7 percent). In
most of the downstream industries, customers were significant in size; for example, in the steel
industry, the top three producers outside of China in 2016 were ArcelorMittal (95.45 million tons of
steel and revenues of €51.3 billion), Nippon Steel (46.16 million tons, €37.0 billion in revenues) and
POSCO (41.56 million tons, €41.4 billion in revenues). 51 In other industries, major customers included
cement producer LafargeHolcim (€24.9 billion in revenues) and non-ferrous metal giant Glencore
(€138.2 billion in revenues). 52
In 2015 and 2016, GDP growth and investment in infrastructure projects drove the demand for
refractory products and solutions. 53 Because of the high weighting of steel’s consumption in
refractory products, overall refractory demand was heavily correlated with steel production. 54 For
2017, global steel output was estimated at 1.69 billion tons representing 5 percent growth over the
previous year. 55 The top five producers of steel were China (49 percent), Japan (6.5 percent), India (5.9
percent), US (4.9 percent), and Russia (4.4 percent). 56
5
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Customers had been increasing their focus on reducing operating costs, switching providers and
trying alternative offerings, all of which caused increased competitive price pressure amongst
refractory producers. Furthermore, enhanced modern technologies, such as improved cooling and
new converting processes, and mega-size furnaces with higher productivity, led to declining specific
consumption of refractory materials in the copper and heavy metal industry. 57 Furthermore, the
Chinese government was incentivizing the modernization of facilities while prohibiting the further
expansion of inefficient manufacturing sites. 58
Industrial producers worked with a wide-range of engineering firms and manufacturers such as
Germany’s Siemens (€79.6 billion sales in 2016), China’s MCC (€29.6 billion sales in 2016), US-based
Fluor (€17.2 billion sales in 2016), UK’s Primetals (€87.1 million sales in 2016), and Canada’s Hatch
(undisclosed revenues) to design and build plants and procure equipment such as furnaces, kilns,
ladles, and tundishes. 59 Setting up new plants or replacing equipment typically represented multimillion-euro contracts, commitments and planning. Generally, equipment lasted up to 30 years and
industrial producers followed distinct procurement processes for equipment versus refractories.
Product and Service Offering
As mentioned previously, refractory products were often separated into five main categories:
formed; monolithic and pre-casts; functional products; equipment and machinery; and, services and
software. 60 Formed refractories were further divided into non-basic and basic. Monolithic products
encompassed different mineral mixes for customers to form their own linings whereas pre-casts were
standardized casted parts. Functional products included slide gate plates, nozzles, plugs, and other
solutions for the inside of equipment that aided in regulating and controlling the movement of liquid
materials. The replacement frequency of products varied greatly – for example in steel applications,
many products needed to be replaced every 30 minutes, 30 hours, or 30 days; whereas in glass
applications, refractory products could last up to 10 years. 61 Downstream customer industries
typically spent between 0.2 percent (non-ferrous metals) and 3 percent (steel) on refractory products
as a percentage of overall production costs. 62 See Exhibit 7 for examples of replacement cycles of
common refractory solutions by industry.
In some industrial applications, refractory producers tailored their solutions to each customer,
which often involved collaborating throughout the R&D and selling processes. Since reliable
refractory products were crucial for the durability of large-scale production sites and the quality of
produced output, 63 many customers remained with one provider for 20-plus years due to specific
needs at production facilities. However, buyers of certain standardized refractory products did not
necessarily maintain the same loyalty to any one supplier and often sought inexpensive local
providers or similarly inexpensive Chinese alternatives.
Pricing
Pricing models varied by industry. For example, in the steel industry, there were no spot market
prices that guided the price of refractory products. 64 The industry generally followed three main
pricing models: direct sales contracts charged per ton or per piece; “cost per performance” contracts
that were tied to output of the customer such as the quantity of steel produced; and, equipment
installation contracts specifically billed by application. 65 Prices were usually fixed for smaller
customers for three to six month periods whereas larger customers negotiated pricing frameworks so
that subsidiaries and production facilities could place orders continuously. 66
6
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
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In general, prices increased with higher grades of raw materials, produced by applying higher
temperatures in the production process. For example, for magnesia, in 2016, the average export price
from Chinese producers for dead burned magnesia (90-97.5 percent purity of MgO) was US$240 per
ton whereas fused magnesia (96-98 percent purity of MgO) was US$500 per ton. 67 In the past few
years, more aggressive exports from China 68 had increased the pressure on market prices, affecting
the profitability of established refractory producers. 69
Industry Financial Metrics
The industry’s return on assets (ROA) averaged approximately 5 percent and return on equity
(ROE) averaged around 14 per cent (refer back to Exhibit 5). Producers strove to optimize their
marginal production costs 70 by improving manufacturing. On average, total cost of sales (i.e., COGS)
usually represented 80 percent of revenues; raw materials and production inputs alone made up
nearly three-quarters of total COGS. 71 Logistics costs accounted for 7 percent of total COGS. 72 Selling,
general, and administrative expenses (SG&A) typically accounted for 14 percent of total revenues. 73
See Exhibit 8 for an example of the typical breakdown of an income statement for a major refractory
company.
Trends
Throughout 2015 and 2016, industry participants classified the megatrends as: volatility,
automation, digitalization, commoditization, differentiation, and the environment. 74 Observers
believed volatility had been caused by a greater portion of shorter-term orders. Changes in steel
production and commodity prices had shifted refractory volumes away from Europe towards local
markets. 75 The shifting geographic demand pattern led to higher overcapacity across the refractory
industry. Major industry players had reportedly accepted orders below fully absorbed costs to cover
a fraction of existing fixed costs. 76 Stimulated by overcapacity, the industry faced an emerging price
war and some players were actively pursuing market share gains through short-term price
reductions.
At the same time, the industry was incorporating more automation and digitization in order to
improve the durability of refractory products, thereby aiming to create greater differentiation and
avoid commoditization. Increasing digitalization through “Industry 4.0” efforts manifested itself in
new technologies such as 3D printing of refractories (also called “additive manufacturing”). 77
However, substitute products were still in its infancy and had not posed a threat to the majority of
refractory products. Increased competitive pressure on prices had caused some companies to shift
from “product-selling” to “solution selling” even though in some industry segments, common
standards led to switching suppliers. In terms of the environment, refractory producers were aiming
to lower CO2 emissions throughout the production process. Customers were increasingly demanding
products with minimal ecological impacts, such as the inclusion of more recycled refractory bricks. 78
Background on RHI
RHI traced its roots back to an 1834 fireclay factory in Prussia (current day Poland). 79 Austrian
operations began in 1881 when magnesite deposits were discovered in Veitsch 80 and subsequently
different permutations of the company existed throughout the next 150 years. 81 In 1987, Radex
Heraklith Industriebteiligungs (RHI) was created via a management buyout. 82 Beginning in the
2000s, RHI initiated a series of takeovers including US-based Monofrax (2007), two Foseco factories in
Scotland and the US (2008), Germany’s Didier Werke (2010), Norway’s Normag (2011), Poland’s
7
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Podolosk Refractories (2011), Ireland’s Premiere Periclase (2011), Switzerland’s Stopinc (2012) and a
69.9 percent stake in India’s Orient Refractories (2013). 83 The company had also divested of Heraklith
in 2007 and Monofrax in 2016 in order to free up fixed capital and increase liquidity. 84 Through its
active corporate portfolio approach, 85 the company aimed to expand its global operations, optimize
cost structures and secure access to mines and raw materials in different geographies. 86
RHI sold 1.98 million tons of refractory products and raw materials in 2016, up 4.6 percent from
1.89 million tons in 2015. RHI had total revenues of €1,651.2 million in 2016, nearly distributed
equally between developed and emerging markets: Western Europe (28 percent of sales), US and
Canada (13 percent), Asia (22 percent), South America & Mexico (13 percent) and the remaining
spread throughout the rest of the world (refer back to Exhibit 1 for RHI’s financials and revenue
distribution). 87 India d and the US were the two largest individual markets, with total revenue of
roughly €170 million and €150 million respectively.
The company produced, sold, and installed a complete range of refractory products under a
number of different brand names including Didier, Veitscher, Radex, Dolomite Franchi, Interstop,
Deltek, and Ankral. RHI had 100 registered trademarks and approximately 1,000 patents within 140
patent families (most of the patents were for functional and flow control solutions). 88 RHI spent €23.9
million on R&D in 2016. 89 At its production facilities, RHI typically grouped output into seven main
categories: unfired magnesia bricks, fired magnesia bricks, magnesia mixes, unfired dolomite bricks,
fired dolomite bricks, dolomite mixes, and functional or non-basic products.
RHI produced refractory products at 30 production facilities in Austria, Germany, Ireland,
Norway, China, India, Mexico, Turkey, Belgium, Switzerland, the UK, Canada, the US, and Chile.
Overall, 56 percent of total production was in Europe, 31 percent in Asia, 7 percent in North America,
and 6 percent in Turkey. 90 The top two countries in terms of output were Austria (33 percent) and
China (23 percent). 91 RHI emphasized the importance of its Veitsch (Austria) plant given its volume,
breadth of products and efficiency. 92 The utilization of overall plant capacity averaged 71 percent in
2016, ranging from 42 percent to 100 percent. 93 The company had reduced energy consumption by 2.3
percent CAGR from 2014 to 2016. 94 Renewable energy could not be utilized due to required firing
temperatures and as such, the company’s energy mix was natural gas (66 percent), electricity (13
percent), coal/coke (15 percent), and oil/other fuels (6 percent). 95
RHI was structured into three divisions with connected cash-generating units: steel (65 percent),
industrial (33 percent) e and raw materials (2 percent). 96
Steel Division RHI’s Steel Division sold: refractory bricks, mixes and functional products;
machinery for the application of unshaped products and the repair of steel production equipment;
and services for flow control. 97 RHI offered “full line supply (FLS)” as a service package to give steel
customers the opportunity to outsource non-core activities such as refractory installation,
manufacturing equipment management, logistics services, engineering and other services. 98
Industrial Division RHI offered products and services to meet the needs of non-ferrous metals,
cement, glass and environmental, energy and chemicals (EEC) industries. For example, for cement
d In 2016, the RHI had three subsidiaries operating in India. RHI India, a wholly-owned subsidiary, was the Indian sales
company of the firm. RHI Clasil, was a manufacturer and supplier of mainly Alumina based refractories for the steel and
cement industries, in which the firm had a majority share of 53.7%. Indian Orient Refractories Ltd, a leading manufacturer, and
supplier of high-grade refractory products, in which the firm had a non-controlling interest of 69.6%.
e Industrial division combined customer from the cement, glass, non-ferrous, energy, environment and chemical (EEC)
industries.
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
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producers, products included preheaters, kilns, coolers, and a wide-variety of basic and non-basic
refractory bricks. 99 For the glass industry, applications included glass melting furnaces, glass tank
bottoms, basins, superstructures, feeders, and regenerators. 100 Finally, for non-ferrous metals and
EEC customers, the company’s solutions often required specialized project engineering capabilities.
Raw Materials Division This division supplied materials to the Steel and Industrial business units
by producing at one of its own 30 production plants and securing supplies from other raw material
producers. RHI was vertically integrated; each year between 60 percent to 80 percent of raw materials
came from company-owned mines and facilities. 101 Raw materials accounted for more than 50
percent of production costs. 102 RHI had mines in Austria (Breitenau, Hochfilzen, and Radenthein)
and Turkey (Eskisehir) and additionally operated seawater plants in Ireland (Drogheda) and Norway
(Porsgrunn). 103
Across all industries, RHI supplied to about 10,000 customers worldwide and classified its clients
by industry and product life-cycle. 104 Roughly 2,000 customers bought products once a year while
others purchased products more frequently. 105 Customers from the steel industry required
continuous consumable products, systems and solutions. In contrast, the EEC industry was driven
more by projects and had longer replacement cycles and thus, handled refractory products as
investment goods.
Although RHI was dealing with customers of varying sizes, no one account represented more
than 10 percent of total sales volume. 106 Price negotiation differed depending on the client and
number of units. For example, an ad-hoc-order of 1,000 units was usually not offered at a discount
whereas regular unit requests with fixed deliverable dates typically involved more negotiations and
discounts. In certain cases, the company had long-term project-based packages that spanned up to 10
years.
Organic Growth Options
Prior to the announcement to acquire Magnesita, RHI had set a goal to reach €2 billion in sales by
2020 on a stand-alone basis. 107 In doing so, the company had created two main organic growth
strategies: “Growth in Core” and “Close to Core.”
Growth in Core
RHI’s strategy of Growth in Core was largely predicated on market growth and market share
gains in each of the key segments where the company operated (see Exhibit 9 for GDP growth by
area). As such, the company was planning on top-line growth in the following industries: €100 to
€180 million in steel, €30 and €60 million in cement, €15 to €20 million in glass, €30 to €40 million in
EEC (energy, environment and chemical). All combined, the company aimed to gain additional sales
of €250 to €500 million in its Growth in Core strategy. 108
However, growing the core came with certain challenges. First, there was the issue of overcapacity
of refractory producers in the industry, which some observers estimated at approximately 30-40
percent. 109 Second, since many of the local players were inefficient with additional capacity, they had
increasingly been lowering prices to achieve greater plant utilization. As such, refractory customers
had been attracted to lower priced products, especially if they could avoid shipping and procure the
products from local producers closer to their production plants. Stefan gave his view of the situation:
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
The assumption in the industry was there was low growth of 2 percent to 3 percent
because the productivity improvements in refractories would compensate for some of
the [lack of] growth of the end customers industries. In reality, with a naked, true
assessment, for the last 20 years there was no growth in the refractory industry. So, how
to grow in a no growth industry is really the question. Unless there is a major
differentiation in technology, cost, or business model, this is rather a difficult challenge.
You cannot build capacities because there are already enough production capacities in
the industry. Any capacity addition you add, gives you a price decline, margin
compression and that comes with relatively difficult payback on any investment. 110
RHI executives were reticent to engage in a price war close or below production costs as it would
destroy profitability. 111 In 2016, RHI had incurred idle costs of €45 million at some of its European
plants as buyers bought from local, lower-price producers. 112 Plant utilization had been considered a
“sore thumb” 113 and executives were well aware of the importance of optimizing production and
investing in plants and processes for greater efficiency especially considering some plants had not
been upgraded since the 1970s. 114
Third, if RHI wanted to address the inefficiencies at their plants, they would need to invest about
€300 million. 115 The modernization of plants came with the potential to eventually reduce RHI’s
COGS by 2 percent to 5 percent (on a pre-merger basis). f
Despite the challenges, there was some upside potential in growing the core. RHI believed it could
create an additional competitive advantage through technology leadership and service excellence. 116
Technology leadership involved providing customers a “ladle-to-mold” bundle package as a “onestop shop” for each industry’s required refractory products. 117 Additionally, the company set out to
incorporate automation and interconnect its customers processes with “big data” and software. 118
The company was also looking at disruptive technology such as 3D printing, which was useful for
certain customers that replaced refractory products continuously. 119 Behind the notion of service
excellence, the company wanted to include services in bundled pricing plans and selectively charge
for stand-alone services in certain industries like glass. 120
From a geographic market perspective, RHI executives felt emerging countries provided the
largest potential for new customers. 121 Furthermore, the increasing industry trend of more short-term
orders meant the company needed to respond quickly and be flexible to customers’ needs. While the
company was well aware of the challenges of adding more production capacity, RHI commissioned a
new production plant in Turkey in the second half of 2016 to get closer to emerging customers in the
Middle East and Africa, providing the benefit of shorter lead times and reduced transport costs.
Close to Core
The next piece of its organic growth strategy involved evaluating a number of identified
opportunities that were deemed to be “close to core” businesses. RHI management had initially
surfaced 20 ideas but had narrowed down the list to eight main opportunities deemed to be closest to
the core with the most potential. Managers had estimated most of the opportunities to provide sales
lifts between €10 to €50 million by 2020. See Exhibit 10 for the eight opportunities with sales, EBIT,
and investment estimates.
f The benefit to cost of sales is an estimate for illustrative purposes only.
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
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Selecting the right opportunities presented RHI executives with dilemmas. First, executives had
identified several opportunities to be in markets where differentiation between products was
generally low (Opportunities 1, 2 and 6).
Second, many of the opportunities required new distribution networks to be established such as
efforts to sell magnesia as a raw material to industries as diverse as animal feed, fertilizers and
environmental applications (Opportunity 1) or expanding the use of aggregates for specialty alumina
(Opportunity 3). In order to confront challenges where new distribution was required, the company
would need to contract two to three new sales staff with capabilities for each opportunity and
dedicate a few years to developing relationships.
Third, several opportunities required higher investments in order to expand production
capabilities such as utilizing existing fired dolomite bricks to expand into a specific area of stainlesssteel production called AOD (argon oxygen decarbonization) (Opportunity 3), expanding product
offerings in steel (Opportunity 4), increasing automation (Opportunity 7) and offering refractory
recycling (Opportunity 8).
Fourth, the company would face timing challenges as most of the opportunities would require a
minimum of one to two years before the company would be able to introduce standardized products
and up to five years before the development of more tailored offerings. Examples of longer
development times included: expanding into the taphole product line for the steel industry
(Opportunity 4), expanding functional products for cement producers (Opportunity 5), expanding into
the US market (Opportunity 6) and entering into brick recycling (Opportunity 8).
Harnessing Synergies of the RHI-Magnesita Merger
RHI initiated merger talks with Magnesita in October 2016. Company executives felt the merger
between the two companies presented excellent growth and value creation options with
complementary products and geographies. At a total implied value of €1,035 million, the transaction
called for RHI to acquire between 46 percent and 50 percent (plus one share) of Magnesita’s
outstanding shares for €118 million in cash and 4.6 million new shares by the combined company
plus merge Magnesita shareholders into the “new” RHI Magnesita. 122 The company planned on
funding the acquisition through refinancing existing debt and syndicated loans at a value of €800
million. 123 Together, both companies had combined revenues of €2.5 billion and refractory output of
2.9 million tons. 124 The new entity’s corporate headquarters would be in Vienna, Austria and
operational headquarters set-up in Rotterdam, Netherlands with shares of the combined company
listed on the London Stock Exchange. 125
Up until 2016, RHI and Magnesita as stand-alone firms, had a long history of stagnating revenues
and unsatisfactory business performance. 126 For example, RHI revenues had declined on a
compounded rate of 2.1 percent from €1,835.7 million in 2012 127 to €1,651.2 million in 2016.
Previously, RHI had also struggled in some of its operations; for example, in 2002, it restructured its
operations in the US, deconsolidating four subsidiaries in order to file those operations for Chapter 11
bankruptcy. 128 RHI had worked to reduce its debt-to-equity, decreasing it from 81 percent in 2015 to
63.5 percent to reach net debt of €332.8 million in 2016. 129 RHI’s weighted average cost of capital
(WACC) was estimated at 6.7 percent. 130 Leading up to 2016, a number of investment banks had
approached RHI with proposals to consider M&A to improve RHI’s competitive market position.
Magnesita’s situation had been different since in local currency, revenues had advanced at a
compound annual growth rate (CAGR) of 6.6 percent over the past five years but fallen when taking
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
into account average exchange rates to the euro: BRL 2,463.7 million (€980.8 million) in 2012 131 to BRL
3,393.1 (€883.7 million) in 2016. Furthermore, the company’s volumes had declined -6.6 percent from
954,000 tons in 2015 to 891,000 tons in 2016. 132 Magnesita incurred operating losses in 2015, returning
to profitability of BRL 464.5 million (€121.0 million) in 2016. 133 Finally, instability in Brazil led to the
downgrading of sovereign credit ratings below investment grade putting additional pressure on
Magnesita’s bonds. 134 Magnesita debt-to-equity had been reduced from 52 percent in 2015 to 43
percent in 2016 with net debt at BRL 1,492.4 million (€388.8 million). 135 Magnesita’s WACC was
approximately 8.1 percent. 136
Magnesita Profile
Magnesita was established in 1939 when magnesite deposits were discovered in Brumado,
Brazil. 137 In the 1940s, the company inaugurated a refractory production facility in Minas Gerais,
Brazil and by the 1960s, set-up its first subsidiary outside of the country in San Nicolás, Argentina. 138
In the 2000s, the company underwent a major transformation, first when private equity firm GP
Investments became majority shareholder in 2007 and then through the acquisition of Germany’s
LWB Group giving the company greater presence in Europe and in the US. 139 In 2013, Magnesita
acquired China’s Dalian Mayerton assets
. 140
By the end of 2016, Magnesita was the world’s third largest producer of refractory products with
more than 1.4 million tons of refractory production capacity per year. 141 The firm owned one
consolidated magnesite mine in Brumado, Brazil and one major dolomite mine in Pennsylvania, US.
The company manufactured raw materials and products at 18 plants in Brazil, Argentina, Belgium,
China, France, Germany, Taiwan, and the US. Some of its operations were joint ventures such as a 70
percent interest in a raw materials plant in Belgium, a 50 percent interest in refractories production
plant in Taiwan, and a 40 percent holding in a US venture (along with competitor Krosaki
Harima). 142
Magnesita was organized into three segments: the refractories segment accounting for 87.5
percent, the mineral segment for 5.8 percent, and the services segment for 6.7 percent. 143 Within the
refractories segment, 83.6 percent of revenues came from the steel industry and the remaining was
split between other industrial sectors. With close proximity to rich raw material reserves and mines in
Brazil as well as the vicinity to the North American market, the firm’s strategic advantage was its
“near-monopolistic” access to raw materials within the Americas. 144
Sales were spread between South America (38 percent), North America (30 percent), Europe (18
percent), Middle East, Africa and Eastern Europe (7 percent), and Asia Pacific (7 percent). 145 With
over 1,000 customers, the company’s largest customer accounted for 11 percent of sales and the top 10
customers summed to 50 percent. 146
Logic behind the Merger
The merger was seen as a “merger of equals” and offered operative, financial, and managerial
synergies. Executives felt the merger “made sense” given the firms’ complementary geographic
footprints and product lines as well as the fact both firms were vertically integrated. 147 Combined, the
two firms would serve 68 percent of the world’s blue-chip steel, cement, glass, and non-ferrous
metals plants (excluding China). 148 Executives felt the merger would: enhance the growth profile,
improve regional presence, broaden product and service offerings, and foster raw material
integration. Additionally, the merger prepared both companies for increasing competition from
China’s increasingly consolidated market and the creation of the major player, China Magnesite
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Mining. 149 See Exhibit 11 for the strategic rationale of the merger. Stefan commented: “[RHI is] at a
crossroads for future growth and has the unique opportunity to form a truly global player in the
refractory industry together with Magnesita.” 150
The companies were preparing for staff redundancies and downsizing at both the Austrian and
Brazilian headquarters. One-time and permanent synergies required upfront restructuring costs
estimated at €100 million split between 2017 and 2018 as well as implementation costs of €120 million
(70 percent in 2017 and 30 percent in 2018). 151 Stefan commented on the timing and suitability of the
merger:
These two companies have known each other for years. So, we don’t buy anything
we don’t know. Many employees have moved back and forth in recent years.
Incidentally, they were the most nervous at first, because they thought, now there will
be revenge. It is even good to know both worlds. In addition, the timing is ideal. We’re
not in the midst of any hype, we’re past the big crash in Brazil and the air is gone in
China. 152
Operative Synergies The companies projected permanent cost savings of at least €159 million
due to economies of scale and selling, general, and administrative savings of 30 percent (for a total of
€92 million). 153 The operative synergies were estimated to ramp up from 40 percent in 2017 to 80
percent in 2018 and reach 100 percent thereafter. 154
Both firms had complementary product portfolios g, and their combined global mining network
was expected to smooth out demand volatility. For example, RHI could benefit from Magnesita’s
reserves and mines in Brazil (Brumado) and the US (York, PA), resulting in further raw material
integration in the Americas. 155 The merger was expected to decrease logistic costs between Europe
and the US. For example, RHI could shift its supply to Brazilian mining sites where appropriate in an
aim to reduce the €40 million spent on freight costs to the Americas in 2016. 156 Furthermore, by
closing or selling plants and transferring magnesite raw material production from Magnesita to RHI
plants, additional merger benefits could be achieved, leading to improved efficiencies and
overcapacity reduction. 157 Backward integration was expected to result in €27 million in permanent
synergies due to a 5 percent reduction in COGS to better utilization and lower variances of local raw
materials. 158 Finally, executives saw complementary product output – for example, at its North
American plants, Magnesita was strong in dolomite products whereas RHI mostly produced
functional and magnesia products in the same region. See Exhibit 12 for the map of the global
footprint of RHI Magnesita.
The merger allowed both firms to increase proximity to their customers and better serve major
steel and industrial blue-chip companies that sought suppliers with expansive global footprints. 159
The merger also provided unique service offers with more on-site functional support and services. 160
See Exhibit 13 for projected synergies of the RHI Magnesita merger.
Financial Synergies resulted from the reduction in the cost of capital due to increased debt
capacity and improved credit worthiness. The merger would allow the combined entity to refinance,
resulting in lower interest rates for new loans and bonds (e.g., Magnesita had to pay average interest
rates of 8.6 percent). 161 Executives estimated permanent financial synergies of €28 million due to a 50
percent reduction in interest payments for the merged firm based in Europe. 162 The combined entity
made it harder for active investors and the financial market to exert pressure on their financial
g High-quality magnesite products on the one side and high-value-added dolomite products on the other side.
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
instruments, which Magnesita had suffered before the merger. 163 Finally, tax shield benefits were
predicted; for example, RHI’s Brazilian subsidiary 2016 loss could create a tax benefit of €90 million
by carrying forward the loss to the combined RHI Magnesita Brazilian subsidiary. 164
Managerial Synergies With its capabilities and experiences in M&A and post-merger
integration, and its Anglo-American business leadership style, many Magnesita executives were
poised to take on top positions of the merged firm, replacing a large part of RHI’s existing
management team. 165 For example, Magnesita chair and CEO Octavio Lopes had already been
identified as CFO of the combined entity. 166
Magnesita Merger as a Template for Growing via Acquisitions
The RHI-Magnesita merger gained approval in the US and Brazil in early 2017. However, the
European Union (EU) authorities imposed two conditions on the merger’s approval: the divestiture
of Magnesita’s activities h in unfired magnesite-based refractory products and the divestiture of RHI’s
dolomite business i in the European Economic Area (EEA). 167 The two divestitures came with
positives: reducing the merged firm’s net debt and helping fund the €100 million restructuring costs.
When considering further acquisitions, executives were considering expanding cost-competitive
production in China and India, targeting geographical gaps and establishing additional production
facilities in the North America. The company was seeking targets that could produce cost avoidance
opportunities. For example, since few mining opportunities existed in the US, RHI had originally
planned to invest €50 million in its own Brazilian plants; after the merger, the combined company
could benefit from Magnesita’s Brazilian mines and raw material supply. 168
Another option was to pursue acquisition targets in India, China or both. For example, RHI had
considered increasing its stake of 69.6 percent in Indian-based Orient Refractories (ORL) and merging
it with its other Indian subsidiaries. RHI also considered a number of smaller Chinese operators,
however, finding the appropriate targets would take time given that nearly 2,000 factories competed
in China and there was an active push by the Chinese government to consolidate under a state-run
enterprise.
Vesuvius: Another Major Merger?
As of the end of 2016, Vesuvius was the world’s largest refractory competitor posting revenues of
£1,401 million (€1.72 billion), EBITDA of £176 million (€215 billion), and EBIT of £133.3 million (€163
billion). 169 See Exhibit 14 for Vesuvius’ financial summary, stock price, geographic and divisional
breakdowns.
The Vesuvius Crucible Company started in Pittsburg, Pennsylvania in 1916. In 1987, Vesuvius was
acquired by the Cookson Group, which itself dated back to a 1704 foundry in Northern England.
Operating as a subsidiary under the Cookson Group, Vesuvius became the world’s largest refractory
producer in 1999 when it acquired US-based Premier Refractories at a value of $410 million. 170 The
next transformative transaction occurred in 2008 when the company acquired the UK’s Foseco for
approximately $1 billion. 171 In order to receive EU regulatory approval, Vesuvius and its parent
h Divestment of Magnesita’s production, sale, and related activities of magnesia-carbon bricks in the EEA, concentrated in
Oberhausen (Germany).
i Divestments of RHI´s dolomite business including sales, production sites and plants in Marone (Italy) and Lugones (Spain).
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
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Cookson were required to sell-off certain parts of the business – RHI acquired the carbon-bonded
ceramics business and integrated it into its isostatically pressed ceramic (ISO) area. 172
Vesuvius became a stand-alone company in 2012 when Cookson de-merged creating Alent to
focus on the electronics industry and Vesuvius for ceramics and refractories largely for
steelmakers. 173 After the de-merger, analysts were mixed on Vesuvius’ prospects. Commenting on
the full-year 2013 results, an analyst released a report called “Cheap for a Reason” explaining the
following: “Vesuvius is a strong niche player in its markets with probably the highest market shares
of any of our coverage. However, its markets are tough… Vesuvius has the worst track record on
organic growth in our coverage group over the past five years, reflecting the weakness of the
recovery in steel production since 2009.” 174 See Exhibit 15 for different analysts’ projections.
In 2013, Vesuvius sold off its metal processing division for €56.8 million to the German-based gold
and silver refinery company Heimerle + Heule 175 and then acquired Ecil Met Tec, a Brazilian
manufacturer of sensors, for €37.8 million and Process Metrix, a US-based manufacturer of laser units
measuring refractory wear in the steel-making process, for €6 million in 2014. 176 The acquisition of
Sidermes – an Italian-based measurement probes and instruments manufacturer – followed in
2015. 177
Not all of Vesuvius’ attempts at growing through acquisition had been successful. During 2014,
Vesuvius attempted an acquisition of the UK’s Morgan Advanced Materials but pulled out after the
Morgan board rejected the deal. Analysts mentioned that Morgan viewed itself as possessing highertechnological capabilities with margins in the high-teens and above. 178 At the time, Morgan
Advanced Materials explained the rationale: “[We] concluded that [the offer] fundamentally
undervalued Morgan’s existing business…and would expose Moran shareholders to Vesuvius’s
lower margin businesses serving the iron and steel sectors.” 179
Vesuvius’s Businesses and Divisions
The company described its business model in terms of four main elements: global presence
(operating in 38 countries with 66 production sites and 17 R&D centers close to the major steel
manufacturers), advanced technology knowledge (ceramic and metallurgical techniques and
equipment), optimized manufacturing (low-cost, lean manufacturing close to customers production
facilities), and service and consistency (reliable inventory management and technical support). 180 See
Exhibit 16 for how the company represented its own business model and global map of operations.
The company was organized in two main divisions: steel (67 percent of revenues and 59 percent of
operating profit) and foundry (33 percent of sales and 41 percent of operating profit). The steel
division was further divided into Steel Flow Control products used in the steel casting process,
Advanced Refractories including bricks and linings for furnaces and ladles, and Technical Services
that worked with steel customers to develop specific products. 181 Unlike some of its refractory
competitors, Vesuvius was not backward integrated into magnesite mines. The company relied on
suppliers and used its R&D centers to conduct quality verification. 182 Geographically, the company’s
revenues were split between the Americas (30 percent), Europe, Middle East and Africa (42 percent),
and Asia Pacific (29 percent). 183
Fit with RHI
While RHI executives had not yet calculated potential synergies between RHI and Vesuvius,
many wondered if the strategic fit was right. Vesuvius’ strength in refractories in steel were seen as
being attractive to RHI considering its high service levels and proximity to major steel manufacturers.
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RHI executives admired Vesuvius’ “factory floor presence” and reputation for effective R&D efforts
where it was able to develop products and services in tandem with customers for mutual benefit.
Vesuvius had increased its R&D budget every year since 2008 and had told investors, “sustainable
growth will come first from technology” aiming to derive 20 percent of total sales from new
products. 184 Its R&D director had talked about “evolving to be a metal flow engineering
company.” 185 The company spent £28.6 million (€35 million) on R&D in 2016. 186
From a product perspective, RHI and Magnesita were strong in fired and unfired dolomite and
magnesite products whereas Vesuvius’ specialty was more in flow control, ceramics offerings and a
wide-range of products for the foundry industry. Vesuvius had 1,659 patents across 159 patent
families. 187 Approximately 14 percent of the company’s revenues came from products launched
within the past five years. Exhibit 17 shows the product overlap between the two companies.
Both Vesuvius and RHI Magnesita had their biggest share of the revenue from the steel industry,
however, RHI Magnesita was backwards integrated into main raw materials and Vesuvius was
not. 188 Geographically, the two companies had considerable overlap in Europe and the Americas,
potentially making it difficult to secure regulatory approval. 189 Vesuvius emphasized a continual
shift to lower cost countries, namely India and China to align with the steel customer base (see
Exhibit 18 for headcount around the world). The company had realized CAGRs of 19 percent in India
and 11 percent in China (in contrast to both countries steel industry CAGRs of 13 percent) and
growth of only 3.3 percent in North America (versus the region’s CAGR of -0.2 percent) and 4.5
percent in Europe (versus the region’s CAGR of 0.6 percent). 190 Company presentations had shown
growth prospects of £200 million (€245 million) in India and £400 million (€490 million) over a 10year period. 191
Charting a Path Forward
As Stefan considered both paths he thought about whether growth above the market rate was
realistic without major investments. 192 Undoubtedly, access to high-purity, low-cost raw materials
was a key differentiator as were a comprehensive product and service offering, a global footprint to
serve customers of all sizes, and a continual focus on R&D. 193 Given the RHI-Magnesita merger was
on its way to being finalized, he knew more specifics about the growth path forward would be
foremost on shareholders’ minds. Did greater value lie ahead in pursuing “Growth in Core” and
“Close to Core” strategies or should he resolutely pursue Vesuvius as a takeover target?
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RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 1
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RHI Financial Statements
Consolidated Statement of Profit and Loss
millions EUR (except volumes and share info)
2016
2015
2014
Sales volumes (in 000 tons, unaudited)
Revenues
Cost of sales
Gross Profit
Selling and marketing expenses
General and administrative expenses
Other income
Other expenses
Operating EBIT
1,979
1,651.2
(1,294.8)
356.4
(105.2)
(134.5)
92.3
(85.8)
123.2
1,892
1,752.5
(1,389.1)
363.4
(112.1)
(122.3)
76.0
(80.9)
124.1
1,868
1,721.2
(1,350.3)
370.9
(114.7)
(114.9)
50.9
(50.3)
141.9
Result from derivatives from supply contracts
Impairment losses
Income from restructuring
Restructuring costs
Net income from US Chapter 11 proceedings
EBIT
Interest income
Interest expenses
Other net financial expenses
Net finance cost
Share of profit of joint ventures
Profit before income tax
Income tax
Profit after income tax
attributable to shareholders of RHI AG
attributable to non-controlling interests
10.1
(8.6)
0.3
(8.9)
0.0
116.1
4.1
(17.5)
(7.8)
(21.2)
10.9
105.8
(29.9)
75.9
74.0
1.9
(58.0)
(31.2)
5.9
(3.3)
0.0
37.5
5.8
(20.5)
(4.6)
(19.3)
9.2
27.4
(9.8)
17.6
16.0
1.6
0.0
(19.8)
0.0
(13.6)
0.8
109.3
2.6
(22.2)
(13.1)
(32.7)
8.2
84.8
(32.3)
52.5
51.0
1.5
Earnings per share in EUR
1.86
0.40
1.28
Consolidated Statement of Financial Position Data
Non-current assets
Current assets
Total assets
Equity
Non-current liabilities
Current liabilities
Total equity and liabilities
832.6
959.6
1,792.2
524.0
736.4
531.8
1,792.2
851.0
953.5
1,804.5
491.4
843.1
470.0
1,804.5
861.9
998.6
1,860.5
493.9
804.8
561.8
1,860.5
Other Financial Data
EBITDA
EBITDA %
Operating EBIT %
ROA % – Pre-Tax
ROE % – Pre-tax
189.1
11.5%
7.5%
5.9%
20.2%
140.0
8.0%
7.1%
1.5%
5.6%
199.4
11.6%
8.2%
4.6%
17.2%
Closing Share Price
Outstanding Shares (in millions)
24.25
39.819
Source:
RHI AG (2016). Admission Prospectus: „RHI MAGNESITA N.V.”, p. 101-102, https://ir.rhimagnesita.com/wpcontent/uploads/2017/11/Condor_CHSH_18-00_171016_inkl-F-Pages_final_without_typo.pdf, accessed March 20,
2023
17
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For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 1, continued
RHI Financial Statements
RHI: Revenue Distribution by Segment and Region in 2016
Source:
RHI AG (2016). Annual Report 2016,
https://ir.rhimagnesita.com/wp-content/uploads/2017/10/Annual_Report_2016-data.pdf, accessed July 2022.
Note:
Total Revenue in 2016: €1,651.2 million. EEC = Environment, Energy, and Chemicals; CIS = Commonwealth of
Independent States.
18
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For the exclusive use of N. Huynh, 2024.
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 1, continued
724-437
Magnesita Financial Statements
Consolidated Statement of Profit and Loss
millions (except volumes and share info)
Sales volumes (in 000 tons, unaudited)
Net revenues from sales and services
Cost of sales
Gross Profit
Operating profit (loss)
Selling expenses
General and administrative expenses
Stock options
Share of profit (loss) of investees
Other operating income (expenses), net
Operating EBIT (profit (loss) before financial income
(expenses))
Financial (expenses) income
Financial income
Financial expenses
Income (loss) before income tax and social
contribution
Income tax and social contribution
Net income (loss) for the period/year
Attributable to: Controlling shareholders
Non-controlling shareholders
Basic earnings/(loss) per share
Diluted earnings/(loss) per share
Consolidated Statement of Financial Position Data
Non-current assets
Current assets
Total assets
Equity
Non-current liabilities
Current liabilities
Total equity and liabilities
BRL
2016
BRL
2015
BRL
2014
891
3,393.1
(2,233.2)
1,159.9
954
1,029
3,380.8 2,872.0
(2,341.3) (1,989.5)
1,039.5
882.5
FX
EUR
2016
0.26049
EUR
2015
0.27480
EUR
2014
0.32069
891
883.9
(581.7)
302.1
954
929.0
(643.4)
285.7
1,029
921.0
(638.0)
283.0
(487.9)
(288.6)
(1.6)
(0.6)
83.3
(456.4)
(274.0)
(3.3)
0.4
(547.0)
(408.5)
(229.0)
(6.1)
1.1
(102.9)
(127.1)
(75.2)
(0.4)
(0.2)
21.7
(125.4)
(75.3)
(0.9)
0.1
(150.3)
(131.0)
(73.4)
(2.0)
0.4
(33.0)
464.5
(240.8)
137.2
121.0
(66.2)
44.0
245.8
(332.1)
309.5
(807.4)
183.4
(448.0)
64.0
(86.5)
85.1
(221.9)
58.8
(143.7)
378.2
75.8
453.9
449.5
4.4
(738.7)
(309.1)
(1,047.8)
(1,048.6)
0.8
(127.4)
37.1
(90.4)
(89.2)
(1.2)
98.5
19.7
118.2
117.1
1.1
(203.0)
(84.9)
(287.9)
(288.2)
0.2
(40.9)
11.9
(29.0)
(28.6)
(0.4)
8.60
8.20
(19.00)
(19.00)
(1.60)
(1.60)
2.24
2.14
(5.22)
(5.22)
(0.51)
(0.51)
3,702.7
2,437.7
6,140.5
1,977.9
2,578.0
1,584.6
6,140.5
4,011.4
2,494.2
6,505.6
1,886.8
3,202.1
1,416.8
6,505.6
4,033.2
2,545.7
6,578.8
2,863.6
2,568.7
1,146.7
6,578.8
964.5
635.0
1,599.5
515.2
671.5
412.8
1,599.5
1,102.3
685.4
1,787.7
518.5
879.9
389.3
1,787.7
1,293.4
816.4
2,109.7
918.3
823.8
367.7
2,109.7
Other Financial Data
EBITDA (unaudited)
632.3
(62.4)
283.9
164.7
(17.1)
91.0
EBITDA %
18.6%
-1.8%
9.9%
18.6%
-1.8%
9.9%
Operating EBIT %
13.7%
-7.1%
4.8%
13.7%
-7.1%
4.8%
ROA % – Pre-Tax
6.2%
-11.4%
-1.9%
6.2% -11.4%
-1.9%
ROE % – Pre-tax
19.1%
-39.2%
-4.4%
19.1% -39.2%
-4.4%
Closing Share Price
23.75
6.19
Outstanding Shares (in millions)
50.0
50.0
Source: Magnesita (2016). Admission Prospectus: „RHI MAGNESITA N.V.”, p. 137-138, https://ir.rhimagnesita.com/wpcontent/uploads/2017/11/Condor_CHSH_18-00_171016_inkl-F-Pages_final_without_typo.pdf, accessed March 20,
2023; FX rates from x-rates.com based on annual average calculated from monthly averages BRL to EUR. RHI AG
(2017), “Shareholder Presentation,” at the 38th Annual General Meeting of Shareholders of RHI AG; Sales volumes
from
Magnesita,
“Magnesita
Anuncia
Seus
Resultados
de
2016,”
https://www.rad.cvm.gov.br/ENET/frmDownloadDocumento.aspx?Tela=ext&numProtocolo=552087&descTipo=I
PE&CodigoInstituicao=1,
and
“Magnesita
Anuncia
Seus
Resultados
de
2015,”
19
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For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
https://www.rad.cvm.gov.br/ENET/frmDownloadDocumento.aspx?Tela=ext&numProtocolo=504106&descTipo=I
PE&CodigoInstituicao=1, accessed June 15, 2023.
Exhibit 1, continued
Source:
Magnesita Revenue Distribution by Segment and Region in 2016
Magnesita (2016). Admission Prospectus: „RHI MAGNESITA N.V.”, p. 137-138, https://ir.rhimagnesita.com/wpcontent/uploads/2017/11/Condor_CHSH_18-00_171016_inkl-F-Pages_final_without_typo.pdf, accessed March 20,
2023.
Exhibit 2 Examples of refractory products and their industry-specific applications
Source:
RHI AG (2017). Investor Relations presentation entitled: “RHI AG – A World Leader in Refractories Technology,”
September 2017, Provided by the company.
Note:
Different refractory products existed depending on the client’s usage and the industry-specific application. For
instance, an industry kiln contained bricks, refractory mixed to fill-out gaps, and functional products such as slide
gates with refractory material or nozzles to protect the kiln from high temperatures. All types of refractory products
depended on selected raw materials. For instance, Magnesia products (dead-burned magnesia, fused magnesia, or
mined magnesite ore) were widely used in different market applications. Magnesite (MgCO3), the naturally
occurring carbonate of Magnesium (Mg), was one of the vital natural sources to produce magnesia (MgO) and
subsequently fused magnesia.
20
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Source:
Value Chain of the Refractory Industry
-21-
RHI Magnesita (2022). Company Presentation, https://intranet.rhimagnesita.com/wp-content/uploads/2022/03/2022-03-rhi-magnesita-company-presentation-16-9final.pptx, accessed October 2022.
Exhibit 3
724-437
For the exclusive use of N. Huynh, 2024.
This document is authorized for use only by Ngoc Mai Huynh in Copy of Copy of BUS 498 Fall 2024 taught by RODERICK FRENCH, George Mason University from Aug 2024 to Feb 2025.
For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 4
Global Raw Material Reserves and Production in 2016
Source:
Casewriters based on IMFORMED (2018). “Basic Instinct – Magnesia Supply to the Refractories Industry,” Extract of
a keynote presented by Mike O’Driscoll at 15th Biennial Worldwide Congress UNITECR 2017, Santiago de Chile,
September 2017, Presentation: http://cdn.ceo.ca.s3-us-west-2.amazonaws.com/1e0l3nf-M-ODriscoll-IMFORMEDMagnesia-IREFCON-2018-lo-res+%282%29.pdf, Paper: http://imformed.com/wp-content/uploads/2018/03/BasicInstinct-IMFORMED-RWF-1-2018.pdf, accessed July 2022.
Note:
bn = billion; m = million.
22
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For the exclusive use of N. Huynh, 2024.
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 5
724-437
Refractory Competitive Landscape
Source:
RHI AG (2017). Investor Relations presentation entitled: “RHI AG – A World Leader in Refractories Technology,”
September 2017, Provided by the company.
Note:
The € 20 billion refractory industry was highly fragmented. The total number of firms worldwide was unknown.
However, 11 selected market players had ~54% of the overall revenue market share. For instance, with total revenue
of € ~ 1.8 billion, Vesuvius had ~9% share of the € 20 bn market. The remaining market share of ~46% was
distributed between thousands of small companies.
EBITDA % by Publicly-Traded Competitors: 2016-2009
Vesuvius
RHI
Magnesita
Imerys
Krosaki
Shinagawa
Morgan
Chosun
Puyan
IFGL
Average
Source:
2016
12.9
11.5
18.6
18.9
7.9
7.6
15.9
9.4
7.1
9.1
11.9
2015
12.2
8.0
(1.8)
19.2
6.9
7.5
15.4
8.4
8.6
11.3
9.6
2014
12.6
11.6
9.9
18.7
6.8
6.7
15.0
12.4
12.1
15.1
12.1
2013
11.9
12.8
15.9
18.2
6.6
7.5
15.7
10.3
10.8
8.5
11.8
2012
11.9
12.6
14.6
17.8
8.3
8.9
15.7
9.8
10.9
46.5
15.7
2011
14.2
11.5
17.5
18.0
11.2
9.3
13.7
10.2
12.2
9.8
12.8
2010
12.0
12.6
19.4
18.7
9.1
6.7
12.6
10.9
15.6
14.7
13.2
2009
8.4
10.5
17.9
18.5
8.8
7.9
0.0
11.1
19.1
10.2
11.3
Average
12.0
11.4
14.0
18.5
8.2
7.8
13.0
10.3
12.1
15.6
12.3
Casewriters based on Financial Summary information from RHI and Magnesita Admission Prospectus and Refinitiv
Workspace.
23
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For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 5, continued
Refractory Competitive Landscape
Graph of EBITDA % 2016-2009 Average by Publicly-Traded Competitors
Return on Assets (ROA) % Pre-Tax by Publicly-Traded Competitors: 2016-2009
Vesuvius
RHI
Magnesita
Imerys
Krosaki
Shinagawa
Morgan
Chosun
Puyan
IFGL
Average
Source:
2016
3.8
5.9
6.2
6.8
5.6
4.5
9.2
4.6
(3.4)
10.2
5.3
2015
4.5
1.5
(11.4)
2.2
2.6
4.8
6.7
2.2
2.2
13.5
2.9
2014
6.2
4.6
(1.9)
7.6
3.4
4.2
3.5
5.4
4.5
17.2
5.5
2013
6.1
5.0
1.9
7.1
2.5
4.4
6.8
4.7
4.3
8.9
5.2
2012
0.9
8.6
2.4
8.4
4.1
4.0
7.6
3.9
3.9
36.6
8.0
2011
5.4
8.0
3.3
8.7
6.2
4.0
10.7
4.3
5.8
8.8
6.5
2010
7.6
7.7
3.0
8.3
7.8
1.7
10.7
4.6
9.5
14.4
7.5
2009
(0.9)
1.9
(0.1)
1.9
(5.5)
0.2
6.5
4.1
11.6
4.2
2.4
Average
4.2
5.4
0.4
6.3
3.3
3.5
7.7
4.2
4.8
14.2
5.4
Casewriters based on Financial Summary information from RHI and Magnesita Admission Prospectus and Refinitiv
Workspace.
24
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For the exclusive use of N. Huynh, 2024.
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 5, continued
Vesuvius
RHI
Magnesita
Imerys
Krosaki
Shinagawa
Morgan
Chosun
Puyan
IFGL
Average
Source:
724-437
Refractory Competitive Landscape
2016
7.1
20.2
19.1
15.6
12.6
9.5
49.7
6.9
(6.5)
16.2
15.0
2015
8.6
5.6
(39.2)
4.9
6.0
10.9
31.4
3.6
4.4
22.7
5.9
2014
11.9
17.2
(4.4)
16.4
8.3
10.2
13.6
9.3
8.8
30.6
12.2
2013
11.5
18.3
4.0
15.2
6.6
11.6
23.5
8.3
9.0
17.1
12.5
2012
2.0
32.8
4.9
18.3
10.8
11.4
28.3
7.2
8.7
75.9
20.0
2011
10.9
33.0
7.0
18.7
16.2
11.9
41.2
8.0
11.5
20.4
17.9
2010
16.1
39.7
6.6
17.6
21.9
5.1
41.2
8.7
16.7
38.0
21.2
2009
(2.1)
13.8
(0.2)
4.7
(14.8)
0.6
29.0
8.4
19.6
12.1
7.1
Average
8.2
22.6
(0.3)
13.9
8.4
8.9
32.2
7.5
9.0
29.1
14.0
Casewriters based on Financial Summary information from RHI and Magnesita Admission Prospectus and Refinitiv
Workspace.
25
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For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 6
Date
Selected M&A Growth Transactions in the Refractory Industry (2007 – 2016)
Acquirer
Type
Description of Activity
% Stake
Firm Value
Undisclosed Deal in Brazil
Kerneos SA
M&A of S&B Industrial Minerals
SA
M&A of Process Metrix (US)
M&A of Ecil Met Tec (BR)
M&A of Sidermes (IT)
M&A of Reframec Manutencao
M&A of Zhengzhou Huawei (CN)
M&A of Orient Refractories (IND)
M&A of Premier Periclase
M&A of SMA Mineral Magnesia
M&A of LWB Refractories (DE)
M&A of Aston China (CN)
M&A of Clasil Refractories (IND)
M&A of LWB Refractories (DE)
n/a
100%
€ 11.37 m
€ 880 m
100%
€ 558 m
100%
100%
100%
51%
100%
69.6%
100%
100%
100%
100%
51%
100%
€6m
€ 37.8 m
n/a*
€ 8 m (1)
€ 346 m (2)
€ 50 m
€ 23 m
€ 13 m
€ 657 m
€ 88 m (3)
n/a*
€ 451 m
2016-Dec
2016-Dec
2014-Nov
Vesuvius
Imerys
Imerys
Acquisition
Acquisition
Acquisition
2014-Aug
2014-Aug
2014-May
2013-Apr
2013-Mar
2013-Jan
2011-Sep
2011-May
2008-Sep
2007-Aug
2007-Feb
2007-Jan
Vesuvius
Vesuvius
Vesuvius
Magnesita
Puyang
RHI
RHI
RHI
Magnesita
Imerys
RHI
Rhone Capital
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Source:
Author’s analysis; Refinitiv (2022); HSBC (2015) analysis for merger proposal with recent market transactions.
Note:
Figures converted to EUR with yearly average exchange rate: (1) €/R$ exchange rate for 2013 of 2.87; (2) €/US$
exchange rate for 2013 of 1.32; (3) €/US$ exchange rate for 2007 of 1.37. *n/a = not available/undisclosed
26
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For the exclusive use of N. Huynh, 2024.
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 7
724-437
Products, Services and Solutions and Life Cycle by Industry Application
Source:
RHI AG (2017). Investor Relations presentation entitled: “RHI AG – A World Leader in Refractories Technology,”
September 2017, Provided by the company.
Note:
*Although refractory products account for less than 2% of the production costs of the customer industry, they were
crucial to the products’ quality.
Exhibit 8
Average Estimates of Refractory Consolidated Income Statement
In Percent (%)
Total Revenue
Cost of Goods Sold (COGS)
Raw Materials
Logistic Costs
Others (Overhead/Labor)
100.00
Gross Profit / Margin
20.00
Selling, General, and Administrative
Research & Development (R&D)
Operating Expenses
14.00
1.00
15.00
Operating Income
5.00
Source:
56.00
5.60
18.40
Casewriter illustration based on insights from the interview with Stefan Borgas.
27
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For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 9
GDP Outlook by IMF Forecast (2014 – 2018e)
GDP Growth in %
2014
2015
2016
2017e
2018e
World
3.4
3.2
3.1
3.4
3.6
Developed Economies
USA
Eurozone
Germany
France
Italy
Spain
1.8
2.4
0.9
1.6
0.2
-0.4
1.4
2.1
2.6
2.0
1.5
1.3
0.7
3.2
1.6
1.6
1.7
1.7
1.3
0.9
3.2
1.9
2.3
1.6
1.5
1.3
0.7
2.3
2.0
2.5
1.6
1.5
1.6
0.8
2.1
Emerging Markets
Brazil
Russia
India
China
Middle East / North Africa
Mexico
4.6
0.1
0.6
7.3
7.3
2.8
2.3
4.1
-3.8
-3.7
7.6
6.9
2.5
2.6
4.1
-3.5
-0.6
6.6
6.7
3.8
2.2
4.5
0.2
1.1
7.2
6.5
3.1
1.7
4.8
1.5
1.2
7.7
6.0
3.5
2.0
Source:
IMF, 2017
Note:
Historical, current, and estimated Gross Domestic Product (GDP) annual growth rates.
28
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€10-15
million
3 Expand aggregates for specialty
alumina
Source:
€11-15
million
2 Expand capacity of Dolomite
€60
bricks for stainless steel producers million
with AOD aggregate
Casewriters with company documents.
€1,8002,000
million
€25
million
€60
million
c Magnesia to environmental
applications
€18
million
€90
million
b Magnesia to fertilizer industry
€10-18
million
€90-130
million
Potential
Sales by
2020
a Magnesia to Animal feed
industry
1 Expand selling of raw material magnesia (MgO)
Market
Size by
2020
RHI’s “Close to Core” Growth Options
Opportunity
Exhibit 10
10-15%
10-15%
10-15%
10-12%
7-16%
EBIT by
2020
Relationships with OEMs
Customized selling
Low-cost raw material
Local market access
Dedicated product offering
Low-cost raw material
Local market access
Dedicated product offering
Low-cost and high-grade raw
material
Access to distribution network
Dedicated product offering
Low-cost raw material
Access to distribution network
Product tailoring
Key Success Factors
Utilize magnesite deposits
Good relationships with
distributors
Timing: 1-2 years
RHI Capabilities &
Timing
Important for competitors Limited competencies in
to have knowledgeable
markets (no existing sales
sales force
force with knowledge)
Timing: 3+ years for knowhow
Differentiation mainly
Production knowledge
though low-cost
Limited cost advantage
Difficult to enter, but after Timing: 1-2 years
substitution is low
Substantial capacity
increase necessary with
uncertainty to capture
reasonable prices
Utilize magnesite deposits
Production knowledge
Limited competencies in
markets
Timing: 3+ years for knowhow
Differentiation mainly
Utilize magnesite deposits
though low-cost
Production knowledge
Difficult to enter, but after Limited competencies in
substitution is low
markets
Timing: 3+ years for knowhow
Differentiation through
magnesia grade
Little differentiation
Low barriers to entry
Market Conditions
-29-
€5-7
million (2-3
sales staff +
expenses)
€7-10
million
€12-15
million
€7-9
million
€7-9
million
Required
Investment
724-437
For the exclusive use of N. Huynh, 2024.
This document is authorized for use only by Ngoc Mai Huynh in Copy of Copy of BUS 498 Fall 2024 taught by RODERICK FRENCH, George Mason University from Aug 2024 to Feb 2025.
€30-100
million
€50-100
million
(Europe)
€300-500
million
(China)
7 Automation
8 Offer refractory recycling
Casewriters with company documents.
€2
billion
6 Expand business in the US
Source:
€60
million
5 Expand cement business with
non-basic functional products
€100-150
million
b Taphole
n/a
€3-5
million
€30-50
million
€11
million
€10-20
million
€10-20
million
Potential
Sales by
2020
€200-300
million
Market
Size by
2020
Lower
costs
between
€3-7
million
0-5%
5-15%
10-15%
7-15%
5-7%
EBIT
by
2020
RHI’s “Close to Core” Options
a Blast furnace runner
4 Expand offerings for
Opportunity
Exhibit 10, continued
Ability to be “One-Stop
Shop” for cement
Not a critical part
Quality and sustainable
products
Many low-cost providers
Critical part
Quality and sustainable
products
Market Conditions
Lack of functional cement
products
Timing: 3+ years
Strong fit with other products
Unfavourable cost position
No production experience inhouse
Timing: 1-2 years
Strong fit with other products
More know-how needed
Timing: 3+ years for know-how
RHI Capabilities & Timing
Improving product
performance
No standardization/
mostly prototype phase
Cost savings
Some robotics experience
More R&D required
High intensity for service
Timing: 5-7 years
Low-cost sourcing,
Ensure raw material cost Detailed raw material quality
processing and
advantage and security requirements
transportation
of supply long-term
Access to existing customers
Cleanliness/quality of
Timing: 1-5 years
secondary raw materials
Ability to blend in secondary
refractories in finished
products
Match technology to
product
Low-cost raw material
Differentiation mainly
No US production of non-basic
Local market access
though low-cost
products
Dedicated product offering Difficult to enter, but after Building new capacity with US
substitution is low
overcapacity not attractive
Insufficient distribution
Timing: 2-3 years
Capability to build Nproducts in-house
Quality and durability
Short-term availability
Quality and durability
Short-term availability
Key Success Factors
€8-12
million
€15-25
million
€30-40
million
€2-5
million
€5-10
million
€5-10
million
Required
Investment
724-437
-30-
For the exclusive use of N. Huynh, 2024.
This document is authorized for use only by Ngoc Mai Huynh in Copy of Copy of BUS 498 Fall 2024 taught by RODERICK FRENCH, George Mason University from Aug 2024 to Feb 2025.
For the exclusive use of N. Huynh, 2024.
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 11
724-437
Strategic Rational and Key Transaction Terms of RHI Magnesita Merger
Source:
RHI AG (2017). Investor Relations presentation entitled: “RHI AG – A World Leader in Refractories Technology,”
September 2017, Provided by the company.
Note:
(1) Assuming issuance of 10 million RHI Magnesita shares.
31
This document is authorized for use only by Ngoc Mai Huynh in Copy of Copy of BUS 498 Fall 2024 taught by RODERICK FRENCH, George Mason University from Aug 2024 to Feb 2025.
For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 12
Global Footprint of RHI and Magnesita in 2016
RHI and Magnesita Production and Sales Offices
Production Capacity by Product Type (in kilotons/year)
Source:
Company Documents
32
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For the exclusive use of N. Huynh, 2024.
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 12, continued
724-437
Global Footprint of RHI and Magnesita in 2016
Raw Material Sources
Source:
Company Documents
Note:
m
=
million;
RHI
=
RHI
AG,
“red
M”-Logo
=
Magnesita.
33
This document is authorized for use only by Ngoc Mai Huynh in Copy of Copy of BUS 498 Fall 2024 taught by RODERICK FRENCH, George Mason University from Aug 2024 to Feb 2025.
€27 million
Backward Integration
1) Assuming EBITDA loss at given margin. 2) Cash cost post-forecast period. (*) Full Run-rate synergies of € 159 million: 40% in 2017e; 80% in 2018e; 100% thereafter.
(**) Total costs of implementation of € 120 million: 70% in 2017e; 30% in 2018e. (***) Total restructuring provisions of € 100 million: 50% in 2017e; 50% in 2018e.
One-time
Note:
-€100 million
Restructuring Provisions
One-time
RHI AG (2016) and Citi Bank (2016). Presentation entitled: “Project Condor,” March 2016, Provided by the company.
-€120 million
Implementation Cost
Permanent
Permanent
Permanent
Permanent
Permanent
Permanent
Permanent
Effect
390
(39)
159
120
510
28
2022e
Source:
-€220 million
€28 million
€28 million
One-time Synergies Effects
Interest Payment Reduction
Financial Synergies
€40 million
Freight Costs and Royalties
More local production and local delivery. (Freight costs to America in 2016
were €40 million.)
Reduction of 5% through better utilization and lower variances of backward
integration with local raw materials leading to lower COGS.
Estimated financial synergies affecting the tax shield included:
Magnesita had very high-interest rates. Estimated permanent synergies of 50%
cut of interest payment for the merged firm based in Europe, resulting in a
reduction in the Cost of Capital.
Estimated one-time synergies effects included:
One-time synergy effect. Cash costs mainly related to severance payments
due to expected plant closures. Costs split over 2017e and 2018e.
Provisions concerning future environmental and removal commitments were
equally applied in 2017e (€50 million) and 2018e (€50 million). No
corresponding cash outflow planned.
Reduction of 30% of general overhead costs (Redundancies).
€46 million
€46 million
Selling Expenses
General and Administrative
Expenses
379
(38)
159
121
500
28
€159 million
368
(37)
159
122
490
28
2021e
Operating Synergies (pre-tax)
Comment
357
(36)
159
123
481
28
2020e
Assumes 10% loss in Revenues post combination of the two businesses.
EBITDA impact on the same PF margin basis.
Estimates for run-rate operating synergies. Ramp up over three years, with
100% achieved in 2019e. Estimated operational synergies included:
Reduction of 30% of sales teams (Redundancies).
347
(35)
127
(36)
(50)
7
353
28
2019e
10.0%
Amount
337
(34)
64
(84)
(50)
(104)
233
28
2018e
EBIDTA Impact of 10% on Revenue
Description
Combined EBITDA before Transaction Effects
EBITDA Impact of 10% Loss in Combined Revenue1
Operating Synergies (*)
Implementation Costs (**)
Non-Cash Restructuring Provisions2 (***)
Net Pre-Tax Synergies
Combined EBITDA Post Transaction Effects
Interest Payment Reduction
2017e
Projected Synergies from RHI-Magnesita Merger (2017e – 2020e)
Synergies (Pre-Tax) in € million
Exhibit 13
724-437
-34-
For the exclusive use of N. Huynh, 2024.
This document is authorized for use only by Ngoc Mai Huynh in Copy of Copy of BUS 498 Fall 2024 taught by RODERICK FRENCH, George Mason University from Aug 2024 to Feb 2025.
144.4
750.1
1,328.4
2,078.5
436.0
544.0
320.3
980.0
1,098.5
2,078.5
Selected Balance Sheet Items
Cash & Cash Equivalents
Total Current Assets
Total Non-Current Assets
Total Assets
Total Current Liabilities
Total Non-Current Liabilities
Net Debt
Total Liabilities
Total Equity
Total Liabilities and Equity
101.5
588.8
1,139.9
1,728.7
285.6
538.0
291.6
823.6
905.1
1,728.7
1,322.0
985.5
336.5
229.1
161.1
107.4
77.4
102.7
2015
GBP
76.9
606.9
1,156.5
1,763.4
334.1
506.2
268.3
840.3
923.1
1,763.4
1,444.4
1,065.3
379.1
253.3
181.3
125.8
109.8
107.9
2014
GBP
76.6
576.0
1,102.9
1,678.9
304.0
491.0
256.4
795.0
883.9
1,678.9
1,510.5
1,117.4
393.1
270.5
179.3
122.6
101.6
(14.5)
2013
GBP
129.5
705.2
1,118.7
1,823.9
337.0
619.1
295.3
956.1
867.8
1,823.9
1,547.5
1,166.8
380.7
266.9
184.2
113.8
17.1
106.4
2012
GBP
139.8
811.0
1,570.1
2,381.1
393.4
741.1
401.7
1,134.4
1,246.7
2,381.1
1,820.9
1,357.4
463.5
315.6
221.9
147.9
106.6
141.5
95.4
753.2
1,435.3
2,188.6
414.7
628.2
333.0
1,042.9
1,145.7
2,188.6
1,792.6
1,322.1
470.5
314.4
225.0
156.1
136.3
133.9
2014
EUR
1.2411
90.2
678.4
1,299.0
1,977.4
358.1
578.3
302.0
936.4
1,041.1
1,977.4
1,779.1
1,316.1
463.0
318.6
211.2
144.4
119.7
(17.1)
2013
EUR
1.1778
159.7
869.7
1,379.6
2,249.2
415.6
763.5
364.2
1,179.1
1,070.2
2,249.2
1,908.4
1,438.9
469.5
329.1
227.2
140.3
21.1
131.2
2012
EUR
1.2332
Some financial figures may vary from Vesuvius’ Annual Reports due to classifications. FX rates from x-rates and where not available exchangerates.org.uk
Note:
12.9%
12.2%
12.6%
11.9%
11.9%
8.7%
8.1%
8.7%
8.1%
7.4%
3.8%
7.8%
7.5%
-1.0%
6.9%
278.49
278.50
278.50
278.50
278.45
1,313.1 1,244.4 1,501.9 1,629.1 1,188.1
176.9
918.7
1,627.0
2,545.8
534.0
666.3
392.3
1,200.3
1,345.5
2,545.8
1,716.5
1,268.5
447.9
299.2
221.4
148.7
96.0
64.4
2015
EUR
1.3774
Refinitiv Workspace, Vesuvius (VSVS.L), accessed June 12, 2023.
FX
2016
EUR
1.2248
Source:
12.9%
12.2%
12.6%
11.9%
11.9%
8.7%
8.1%
8.7%
8.1%
7.4%
3.8%
7.8%
7.5%
-1.0%
6.9%
278.49 278.50 278.50 278.50 278.45
1,072.1
903.4 1,210.2 1,383.2
963.4
1,401.4
1,035.7
365.7
244.3
180.8
121.4
78.4
52.6
Selected Income Statement Items
Revenue from Business Activities – Total
COGS Total
Gross Margin
Selling, General & Administrative Expenses
EBITDA
EBIT
Net Income before Tax
Net Income
Profitability / Return
EBITDA Margin – %
EBIT Margin %
Net Income %
Common Shares Issued (in millions)
Market Capitalization
2016
GBP
Vesuvius Financial Highlights
Currency (in millions)
Exhibit 14
724-437
-35-
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This document is authorized for use only by Ngoc Mai Huynh in Copy of Copy of BUS 498 Fall 2024 taught by RODERICK FRENCH, George Mason University from Aug 2024 to Feb 2025.
For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 14, continued
Source:
Vesuvius Stock Chart: December 2012-April 2017
Casewriter with stock information from Refinitiv Workspace, Vesuvius (VSVS.L), accessed June 8, 2023.
Sales by Division
Source:
Operating Profit by Division
Sales by Geography
Casewriter with data from Vesuvius 2016 Annual Report.
36
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For the exclusive use of N. Huynh, 2024.
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 15
724-437
Vesuvius (VSVS) Analyst Projections as of March 2017
Currency (in
millions)
2016
2017E
2018E
2019E
2016
2017E
2018E
2019E
GBP
GBP
GBP
GBP
EUR
EUR
EUR
EUR
1.2248
1.2248
1.2248
1.2248
FX
Deutsche Bank March 6, 2017
Income Statement
Sales revenue
EBITDA
EBITDA/Sales
1,402
1,529
1,565
1,608
1,717
1,873
1,917
1,970
176
199
211
225
216
244
258
276
12.6%
13.0%
13.5%
14.0%
12.6%
13.0%
13.5%
14.0%
EBIT
116
137
147
160
142
168
180
196
EBIT/Sales
8.3%
9.0%
9.4%
10.0%
8.3%
9.0%
9.4%
10.0%
1,967
1,974
1,970
1,971
2,409
2,418
2,413
2,414
Total liabilities
869
845
801
754
1,064
1,035
981
924
Net debt
320
269
218
161
392
329
267
197
1,286
1,774
1,723
1,666
1,575
2,173
2,110
2,041
1,490
1,550
1,581
1,717
1,825
1,899
1,937
Balance Sheet
Total assets
Enterprise Value
(EV)
Morgan Stanley March 7, 2017
Income Statement
Sales revenue
EBITDA
1,402
176
200
208
217
216
245
255
266
12.6%
13.4%
13.4%
13.7%
12.6%
13.4%
13.4%
13.7%
EBIT
116
137
144
152
142
167
176
186
EBIT/Sales
8.3%
9.2%
9.3%
9.6%
8.3%
9.2%
9.3%
9.6%
320
308
289
268
392
378
354
328
1,315
1,826
1,801
1,774
1,611
2,236
2,206
2,173
EBITDA/Sales
Balance Sheet
Net debt
Enterprise Value
(EV)
Source:
Compiled by casewriters from Jonathan Hurn, Jonas Hoersch, “Vesuvius: An operationally geared 2017,” Deutsche
Bank, March 6, 2017. “Robert Davies, Ben Uglow, Lucie Carrier, “Vesuvius PLC: Updating Estimates to Reflect the
2016 Profit Beat,” Morgan Stanley, March 7, 2017.
Note:
Historical figures such as Enterprise Value are different between the two analysts due to different methodologies.
FX rates were added by the case writer. For 2017 to 2019, FX rates were held at the 2016.
37
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For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 16
Source:
Vesuvius Business Model and Global Map of Operations
Vesuvius plc (2016), Vesuvius 2016 Annual Report, pp. 6-7, 10-11.
38
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For the exclusive use of N. Huynh, 2024.
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Exhibit 17
724-437
Business Overlap between RHIM and Vesuvius
Source:
RHI Magnesita N.V. (2018). Corporate Development presentation entitled: “RHI Magnesita 2025 Corporate
Strategy,” August 2018, Provided by the company.
Note:
RHIM had strong basic products and linings; Vesuvius led in flow control.
Exhibit 18
Source:
Vesuvius Headcount plans
Vesuvius Plc (2015). “Capital Markets Day: Delivering on our Commitments,” June 18-19, 2015, p. 15, 20,
https://www.vesuvius.com/en/media/press-releases/corporate/2015/vesuvius-plc-capital-markets-day.html,
accessed June 12, 2023.
39
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For the exclusive use of N. Huynh, 2024.
724-437
RHI Magnesita (A): Brick by Brick – Organic Growth or Another Major Merger?
Endnotes
1 RHI AG (2016). “Stefan Borgas appointed new CEO as of December 1, 2016 for five years (ad hoc)”, September 26, 2016,
https://ir.rhimagnesita.com/stefan-borgas-appointed-new-ceo-as-of-december-1-2016-for-five-years-ad-hoc, accessed August
2022.
2 “Austrian specialised fireproof materials maker RHI CFO Barbara Potisk-Eibensteiner and CEO Stefan Borgas address a news
conference in Vienna,” Alamy, March 15, 2017, https://www.alamy.com/austrian-specialised-fireproof-materials-maker-rhicfo-barbara-potisk-eibensteiner-and-ceo-stefan-borgas-address-a-news-conference-in-vienna-austria-march-15-2017reutersleonhard-foeger-image399944331.html, accessed March 16, 2023.
3 “RH and Magnesita to combine to create a leading refractory company,” RHI Magnesita, October 5, 2016
4 “Refractory Manufacturing,” US Environmental Protection Agency,
https://www3.epa.gov/ttnchie1/ap42/ch11/final/c11s05.pdf, accessed March 20, 2023.
5 “Refractory Manufacturing,” US Environmental Protection Agency,
https://www3.epa.gov/ttnchie1/ap42/ch11/final/c11s05.pdf, accessed March 20, 2023.
6 IMFORMED – Industrial Mineral Forums & Research Ltd (2018). “Basic Instinct – Magnesia Supply to the Refractories
Industry”, Extract of keynote presented by Mike O´Driscoll at 15th Biennial Worldwide Congress UNITECR 2017, Santiago de
Chile, September 2017, Presentation: http://cdn.ceo.ca.s3-us-west-2.amazonaws.com/1e0l3nf-M-ODriscoll-IMFORMEDMagnesia-IREFCON-2018-lo-res+%282%29.pdf, Paper: http://imformed.com/wp-content/uploads/2018/03/Basic-InstinctIMFORMED-RWF-1-2018.pdf, accessed August 2022.
7 Tracey Sinha-Spinks, “How Is It Made? An Infographic of the Iron and Steel Manufacturing Process,” Thermo Fisher, June 4,
2015, https://www.thermofisher.com/blog/metals/how-is-it-made-an-infographic-of-the-iron-and-steel-manufacturingprocess/, accessed June 12, 2023; “The steelmaking process,” World Steel Association, https://worldsteel.org/aboutsteel/about-steel/steelmaking/, accessed June 12, 2023.
8 Tracey Sinha-Spinks, “How Is It Made? A…