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Einhorn's Martin Marietta Short Exposes Vulcan M&A Bulls

Earlier in May, a Delaware court delayed Martin Marietta's bid for Vulcan Materials by four months and beyond the company's June annual shareholder meeting where a slate of hostile Martin Marietta directors had been nominated to Vulcan's board.

Findings by Delaware Chancery court judge Leo E. Strine on May 4 that Martin Marietta breached confidentiality agreements in its bidding process halted the merger by four months and past Vulcan's shareholder meeting, blocking a critical proxy contest that may have moved the merger forward. However, on Wednesday, Bloomberg reported that Martin Marietta will get an expedited appeal to the decision, which is expected by May 25.

Prior to Einhorn-fueled Wednesday trading, Vulcan Materials shares only declined moderately and remained above levels prior to Martin Marietta's hostile takeover, even in the face of setbacks.

"This is a setback for MLM, but in our view the coming decision of the DOJ on the assets that need to be divested remains the key decision," wrote Jefferies analyst Mike Betts in note to clients reacting to the initial Delaware courts decision. A key to any deal, combining the two top players in their niche market, might hinge on regulatory approvals from the antitrust division of the Department of Justice and Martin Marietta's previously announced divestiture plans.

If Einhorn's premise that makers of inputs for roads are facing a poor outlook for forward earnings, now could be a logical time to consider a merger, which Martin Marietta had noted would create significant synergies.

Those who already wrote off Martin Marietta's initial exchange offer or have a conviction of Vulcan Materials' share value as a standalone may see an opportunity, especially if Einhorn's analysis provides little new information to longtime investors.

In an early May note to clients, Rudiger of Wells Fargo noted that shares of Vulcan were unlikely to fall back to a share price in the mid $30s before a hostile bid emerged because of the company's progress in cutting costs, and improving margins in its construction aggregates business to go with generally improving earnings.

In early Thursday trading Vulcan Materials shares added to an over 8% Wednesday decline, falling nearly 2% to $34.56 -- its 2012 low.

"If [Vulcan Materials] shares trade down significantly below $35, we believe they would be attractive to long-term investors, all else being equal," wrote Rudiger, noting that nearly $500 million in planned asset sales can pare Vulcan's debt to more sustainable levels.

If traders are right on their expectation that Martin Marietta will move forward with its bid, its also possible that an M&A war could reheat. Since Vulcan shares remain tied to the exchange conversion, a recovery in Martin Marietta shares would also be a benefit, were it to successfully refute Einhorn's short call.

"Vulcan Materials dramatically cut costs and put in restructuring efforts," says Shah of Tullett Prebon. With Einhorn's statements and a diminished value of the share exchange, he adds, "if you are Vulcan Materials board or a shareholder do you really want to have Martin Marietta stock at 0.5?"

For more on hostile M&A, see why 2012 deals hinge on Goldman Sach's idea of fairness. Also see why a kinder, gentler activist emerged in recent Nook and AOL deals with Microsoft for more on shareholder activism.

-- Written by Antoine Gara in New York

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