18 March 2005 17:00 [Source: ICIS news]
Analysts believe the combined company, with $4.1bn in sales, will build on global leadership positions, achieve cost savings and hold a strong financial position.
"Our vision is to construct the world’s best specialty chemicals company," said Crompton chairman, president and chief executive Robert Wood. "The refinement of our collective portfolios to a select number of well positioned leaders in high-value niche markets is our strategic objective. We know that if we accomplish that goal, we will reward shareholders with the kind of returns that they’ve always hoped for but rarely received from our firm in the past years."
Deutsche Bank analyst David Begleiter has upgraded Crompton from "hold" to "buy" and raised his price target on the stock from $13 to $18. "Crompton’s announced merger with
"This merger creates a strategic advantage for both companies as the major polymer additives businesses are complementary with each other," said Fulcrum Global Partners analyst Frank Mitsch. "We believe that significant cost savings can be achieved as both companies have certain degrees of operation and business overlaps."
$95m in cost savings
Crompton expects to achieve recurring annual cost savings of between $90m and $100m over three years, with 85% coming by the end of 2006. Of the total savings, $65m is expected from organisational redesign, $15m from purchasing and $15m from other synergies such as insurance, outside auditors and pension service.
On top of these savings, Crompton’s net operating losses will save the new company around $20m/year in cash taxes in the early years following the merger. The deal is expected to close by mid 2005. Crompton was advised by Morgan Stanley and Citigroup, while Merrill Lynch acted as advisor to
"Rapid and seamless integration is the key to a successful merger, and we’ve already begun careful planning," Wood said. "We are determined that sundry problems that undermine the best intentions of some mergers will not plague this combination."
Wood will personally oversee the integration, which will be led by Crompton senior vice president of strategy and development Greg McDaniel and
"We believe these cost savings are primarily in the polymer additives business from the consolidation of sales offices, advertising and headcount," said JPMorgan analyst Jeffrey Zekauskas.
Deutsche Bank’s Begleiter has boosted his 2006 earnings/share (eps) estimate on Crompton from 90 cents to $1.10 based on the combination and the resulting $90m to $100m in pre-tax synergies, which translates into 20 cents/share in 2005. He maintains his eps estimate of 65 cents for 2004.
Price appears fair
In the deal, Crompton will exchange 2.2232 of its shares for every share of
JPMorgan’s Zekauskas said Crompton is paying a fair price for Great Lakes at 8.8 times estimated 2005 earnings before interest, taxes, depreciation and amortization (EBITDA) and 10 times 2004 EBITDA based on the closing price of Crompton before the deal was announced 9 March.
Crompton shareholders appear to be the primary beneficiaries of the transaction, according to the Deutsche Bank analyst. "Crompton is acquiring a company with a far better balance sheet, strong cash flow and on the verge of a significant earnings ramp," Begleiter said. "In contrast, we believe
Crompton balance sheet improves
The combined company will have a stronger balance sheet than Crompton with around $1bn in net debt and a combined $400m in 2004 EBITDA.
Moody’s Investors Service has placed Crompton’s corporate credit rating of Ba3 (equivalent to S&P’s BB-) on review for possible upgrade. "The initial credit profile of the combined company is likely to be materially stronger than Crompton’s current financial profile on a stand alone basis," said Moody’s credit analyst Mark Gray.
Crompton will first aim to pay off $200m in securitized receivables, according to Crompton chief financial officer Karen Osar. "We have working capital needs to fund in the second and third quarters, but there will be surplus cash post-closing to begin to really knock down those receivables balances," she said. "Our target is to pay it all down by the end of 2006."
Investors cheer deal
Wall Street cheered the deal on both sides, initially sending shares of Crompton up $1.85 to $15.31 and
Shares of Crompton have had a huge run over the past year, rising from a low of $5.02 in July 2004 to $13.46 just prior to the merger announcement as the company settled litigation related to rubber price fixing issues and boosted profitability through cost cuts and price increases.
On the other hand, shares of
"In chemicals, when the CEO gets fired for performance reasons, it is not too surprising to see the company acquired shortly thereafter," said Fulcrum Global’s Mitsch. "Crompton CEO Bob Wood [has always] emphasized his strategy of positioning the company as a major specialty chemical company."
Asset sales likely
The merger will likely spur a number of asset sales. With plastic additives, at around $1.2bn in sales, being the centerpiece of the new company, potential divestitures include Crompton’s Davis-Standard polymer processing equipment unit and
"We want to drive for as many market-leading business positions as we can, and get out of any businesses where we don’t have critical mass or market leadership rapidly," said Wood. "We’re a specialty chemical company - not an equipment company. We’re looking for solutions to that issue along with a couple others, and I anticipate we’ll get that done before too much longer."
"It is likely that the polymer processing equipment will be sold soon," said Fulcrum Global’s Mitsch. "Although Davis-Standard serves similar customers as polymer additives, our prior experience suggests that the two businesses are hardly complementary."
Crompton’s Davis-Standard polymer processing equipment business generated $180m in sales and $3.4m in operating profits in 2004 out of a total of $2.55bn in sales for Crompton.
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