BASF buys will lift earnings not value-Credit Suisse

16 January 2006 15:28  [Source: ICIS news]

LONDON (ICIS news)--Successful acquisitions of both Engelhard and Degussa’s construction chemicals business should lift BASF’s earnings per share by 6% in 2007, Credit Suisse said on Monday

In a note to clients, the bank said the twin purchases present BASF with the challenge of trying to balance improved earnings in the trough of the cycle - which it exepcts in 2009 - with short-term value destruction.

Its analysts suggest that while lifting earnings the acquisitions would only be value-neutral in terms of cash flow return on investment (CFROI) in the long term due mainly to the high multiple being offered for Engelhard.

The bank forecasts the start of the next petrochemicals downturn in 2007 with a low point in 2009

BASF last Monday (9 January) launched its hostile bid for the US based catalysts maker. In late December it sought exclusive negotiating rights for Degussa’s construction chemicals business when it became clear the specialty chemicals producer wanted to sell. Both deals should be earnings enhancing from the outset collectively by 5% for 2006 and 6% for 2007, Credit said. Cost savings could be in the region of $50m, it believes.

The bank also said it was encouraged that BASF will be buoyed by higher comparative sales volumes and currencies in the first half of 2006. The company was expected to benefit too from high absolute prices for commodity chemicals and higher energy prices. Sales volumes in the first half of 2005 were weak due to de-stocking and the stronger US dollar.

Consensus expectations of an EBIT (earnings before interest and tax) of Euro630m ($761) are reasonably conservative, the bank said. Credit Suisse reached its conclusions following a meeting with BASF Chief financial officer (CFO), Kurt Bock, on Friday (13 January).


By: Nigel Davis
+44 20 8652 3214



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