InterviewAshland/Hercules forms specialty core

11 July 2008 20:58  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS news)--Ashland’s planned $3.3bn (€2.1bn) acquisition of US-based specialty chemical firm Hercules will “create a stronger specialty chemical core that will define the company,” Ashland chairman and CEO James O’Brien said on Friday.

“Part of our strategy has been to find the right property to bring into our corporation, and this fits us well as we will now have 75% of EBITDA [earnings before interest, tax, depreciation and amortisation] from specialty chemicals,” said O’Brien. “This defines the company with a core platform.”

Ashland will pay $18.60 in cash and 0.093 shares for each share of Hercules, and also assume $700m in Hercules net debt. The value for Hercules equated to $23.01/share based on Ashland’s previous stock price of $47.41.

The deal values Hercules at 8.4x EBITDA for the 12 months ended in March. Dow Chemical is buying specialty chemical firm Rohm and Haas for 11.5x EBITDA.

The deal marks the first large transformational deal for Ashland, as it previously focused on bolt-on acquisitions in the range of $200m or less.

“We were attracted by Hercules’ renewable chemistries in its Aqualon business, as well as its growing paper chemicals business,” said O’Brien. “Paper chemicals gives us a strong vertical business to grow from and it has adjacencies with our industrial water treatment business.”

Ashland will combine its water treatment business with Hercules’ paper chemicals unit to form a global paper and water treatment business with sales of around $2bn.

“Hercules is big in the paper making process and product development area while Ashland’s focus is in the utility side with water treatment, so once we integrate these businesses, we will participate more broadly at the paper mill and other paper markets.”

Ashland, which will have annual sales of over $10bn following the Hercules acquisition, is aiming for cost savings of at least $50m by the third year.

Cost savings will come from headcount reduction as well as plant rationalisations across the group, O’Brien said.

Ashland had been in discussions with Hercules on a potential combination as early as December 2006, along with other specialty chemical companies, said O’Brien.

“Hercules rose to the top of our target list, and we really started re-engaging in talks in May this year,” said O’Brien. “Once we started that process it went pretty quickly. We spent a lot of time looking at this deal.”

Ashland moved in May as it believed it was high time to lay the groundwork for its strategy in the next upturn, according to O’Brien.

“Even though things are not perfect in the external environment, we are optimistic and believe things will get better,” he added. “So during times when conditions aren’t strong, we see the opportunity to build the teams to be ready when things turn for the better.”

As for Ashland Distribution and Valvoline, O’Brien described them as “complementary adjacencies,” which Ashland will continue to own and operate.

Shares of Ashland were down $6.54, or 13.9%, to $40.87 in Friday afternoon trading, while shares of Hercules jumped $4.28, or 25.7%, to $20.94.

($1 = €0.63)

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By: Joseph Chang
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