INSIGHT: More to Rohm and Haas share buybacks

18 July 2007 15:59  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Innovation that delivers is a neat slogan used by Rohm and Haas but the company has proved this week that share buybacks deliver a great deal more.

Forget the slog of research, development and hard-nosed marketing. The sharp jump in the firm’s stock market value on Tuesday was driven by the board’s decision to plough $2bn back into its own shares, equivalent to nearly 15% of its market value, some from its hard earned cash pile and some financed by new debt.

The attractions of share buybacks for the largest companies have waned over the past few years. But they are still popular and become something of a trend in the US with companies such as giant retailer Wal-Mart making the move, partly due to the current high acquisition cost environment.

Extended buyback programmes often smack of management indecision and imply that the board can’t think of anything positive to do cost effectively with the company’s cash.

Buying your own shares can be a good use of resources and a good defence mechanism. If the strategy works, the company’s stock market value rises and shareholders feel much more comfortable. You could almost say they feel appreciated.

The Rohm and Haas decision was clearly welcomed. The shares shot up 10% following the announcement to close at $61.27 on the day; financial analysts raised their price targets for the stock.

There was relief that the company did not look as though it was planning any big, dilutive acquisitions. And there was some joy that it was doing things the private equity way by ramping up debt – the first $1bn tranche of share purchases will be financed by new debt – and creating a tax shield on interest expense.

Management can win with this move in a couple of ways. It is using debt creatively, in the current climate at least. It also has the capability to lever Rohm and Haas resources to drive greater value creation.

That is the message that has been communicated strongly. Cash from operations has risen significantly since 2002. The company says it has a clear strategic plan “that raises the bar on financial performance”.

Rohm and Haas's 2010 plan aims to accelerate growth and value creation as might be expected.

The targets are: sales demand growth of 5-7% a year, which in itself implies more attention to emerging markets and newer technologies; EBITDA (earnings before interest, tax and depreciation) growth of more than 20%; a return on capital employed of more than 13%; and earnings per share (EPS) growth of between 10% and 14%.

Over the past four quarters the company has hit most of these targets – apart from the top line growth goal.

In the first quarter of this year, however, EPS and sales demand growth were shy of the target as Rohm and Haas battled against the construction downturn in the important US market and troubles in the US automobile sector.

Both problems will continue to have a negative impact on the company through 2007.

Shifting performance generally up a gear, however, will have to come from stronger organic growth in businesses such as acrylic polymers and electronic materials.

The company has niche technologies such as Viance wood treatments which it says it can broaden as well as new technologies to bring to market.

Chief financial officer Jacques Croisetiere spoke also last month about making smart bolt-on acquisitions in flat panel display materials and in paints and coatings.

Not surprisingly, given the latest announcement, he talked of cash discipline and leveraging the balance sheet.

“The evolution of our capital structure is an important complement to our Vision 2010 strategic plan for accelerating value creation,” CEO Raj Gupta said on Monday (16 July).

The move could also be seen as a catalyst for further change at the specialty materials group.

Further rationalisation of the portfolio can be expected. Citigroup analysts have talked about the possible sale of the firm’s salt and powder coatings businesses which together might be worth $700m.

Taking on an increase in the debt to capital ratio of 50% also suggests that management will drive the company harder and be more focused on the better performing markets.

The Rohm and Haas share buyback plan is not a no-risk strategy and will be expected to work many ways.

By: Nigel Davis
+44 20 8652 3214

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