FOCUS: BASF bid highlights auto catalysts buzz

04 January 2006 14:28  [Source: ICIS news]

Testing heavy duty diesel catalysts, Johnson MatthLONDON (ICIS news)--BASF's hostile $4.9bn (Euro4bn) bid for Engelhard reveals strong growth potential in the auto-catalyst industry and will have a positive knock-on effect on fellow producers like Johnson Matthey and Umicore, analysts said on Wednesday.

"The proposed bid for Engelhard ... should serve to remind investors of the potential benefits of imminent emissions legislation to the autocatalysts industry," Credit Suisse First Boston (CFSB) said in a note to clients.

CSFB said the BASF offer price of $37 a share would represent 10.2 times its estimated 2006 enterprise value (EV) to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio for Engelhard.

On the same calendar year basis a Johnson Matthey EV/EBITDA valuation multiple would be 11.3 times, reflecting the difference in profitability of the two firms, it said.

The bank expects Engelhard to return an EBITDA margin in 2005 of 17% excluding precious metal sales. The Johnson Matthey margin on the same basis is estimated at 24%.

CSFB said that the Engelhard businesses would represent just 4% of its estimate for BASF’s 2006 operating profits. “We do not view this as a significant deal for BASF,” it said, adding, however, that the implication for valuations across the sector was more interesting.

Engelhard’s catalysts businesses would represent 7% of pro forma BASF sales and pigments 2%, Morgan Stanley said. It noted that Engelhard’s growth potential was driven by auto catalyst sales with potential top line growth from the Environmental Technologies segment of 5%-plus.

Growth will be boosted through 2007 by the introduction of cleaner fuel regulations in Europe, China and the US. Between 2007 and 2010, growth will be driven by the US and Europe strengthening regulations and increased auto-catalyst volumes, it said.

Engelhard makes 30% of its sales in the auto sector, 15% in chemical processing, 14% in the paper industry and 12% in refining.

Environmental technologies accounted for 22% of 2004 group sales of $4.2bn with earnings before interest and tax (EBIT) margins of 15.2%.

The firm’s Process Technologies segment accounted for 15% of 2004 sales with 14.2% EBIT margins. It is focused on chemical, polyolefins, petrochemical and refining catalysts.

The Appearance and Performance Technologies segment accounted for 17% of 2004 sales with margins of 9.9%.

Materials Services, which covers the base and precious meals used by the group including metals trading accounted for 46% of 2004 sales and had margins of 0.8%.

BASF sees synergies in pearlescent pigments where Engelhard occupies the number two global position and where growth potential is estimated at 5% a year.

CSFB has an “outperform” rating on catalysts producer Umicore, the performance of which is highlighted by the bid.

Umicore in 2003 bought OM’s catalysts and precious metals business for $752m in a deal which  helped consolidate its catalysts position. In 2001 OM bought Degussa’s dmc2 metals catalysts business for $1.02bn and sold on materials, pigments and ceramics operations to Ferro for about $540m.

Morgan Stanley said the price BASF is prepared to pay for Engelhard justifies Johnson Matthey’s current share price but added it saw little upside potential in the Johnson Matthey stock.

By: Nigel Davis
+44 20 8652 3214

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