News Focus: Ashland's transformation story not over with ISP deal

13 June 2011 00:00  [Source: ICB]

O'Brien: "ISP was always at the top of our list"


After Ashland's planned acquisition of ISP for $3.2bn, commodity chemical assets could be targeted for sale

US-based Ashland is taking a defining step in its transformation into a high-margin, high-growth specialty chemicals company with its planned acquisition of US-based International Specialty Products (ISP). But the story is far from over - the next step could involve the sale of commodity businesses.

"This has been a transformational story for Ashland," said chairman and CEO James O'Brien in an interview with ICIS. "[The Hercules acquisition] was our first choice to upgrade our position in specialty chemicals, and ISP will define us. But the story is not fully written. We will focus on paying down debt."

Ashland has agreed to buy ISP for $3.2bn (€2.2bn) in cash, representing a multiple of 8.9 times earnings before interest, tax, depreciation and amortization (EBITDA) of $360m for the 12 months ended March 31.

The deal will expand Ashland's place in the personal care, pharmaceutical, food and beverage and oilfield chemicals markets, boosting company annual sales from $6.0bn, to $7.6bn and EBITDA from $735m to $1.1bn.

The acquisition builds upon Ashland's Aqualon functional ingredients business (personal care, food and beverage, pharmaceutical, oilfield chemicals, coatings) - which came with the acquisition of US specialty chemicals firm Hercules in November 2008.

"After we acquired Hercules, we looked at its Aqualon business and wanted to grow that portion. We saw broader opportunities in personal care and food and beverage, and ISP was our number-one choice," said O'Brien. "ISP was always on the top of our list of acquisition candidates. We had the capacity to buy, and were in a fortunate position when the family wanted to transact."

ISP is closely held by the Heyman family. Former ISP chairman and owner Sam Heyman died in 2009. After the close of the deal, expected before the end of September, about 74% of Ashland's EBITDA will be from specialty chemicals businesses, said O'Brien. Based on figures from the 12 months ended March 2011, Ashland's EBITDA margin will move up from 12.3%, to 14.5%. ISP had a robust EBITDA margin of 22.5% in the 12-month period.

Wall Street applauded the deal, and Ashland's stock price initially soared $7.12, or 11.6%, to $68.34 - a rare gain for an acquiring company. The shares have since fallen back to about $64 with the overall decline in the equity market.

"This deal should cement the company's position as a true specialty chemical company with strong leverage to the personal care, pharmaceutical, food and beverage, energy, adhesives, water treatment, and coatings markets," said Laurence Alexander, analyst with US-based investment bank Jefferies & Co.

Aside from its specialty chemicals businesses, Ashland's other, more commodity businesses will include its performance materials unit (unsaturated polyester resins, vinyl ester resins and adhesives), as well as ISP's butanediol (BDO) and emulsion styrene-butadiene rubber (ESBR) businesses.

O'Brien would not say outright if these businesses would be considered for divestiture. "We have always looked to buy and sell businesses at their best value," said O'Brien. "Right now we are pressing on our performance materials and our water-technologies businesses to improve their margins."

Ashland's performance materials unit had an EBITDA margin of just 6.9% in the 12 months ended March, while its water-treatment business had a 9.4% margin.

On the ISP side, while absolute EBITDA margin breakdowns of business units were not disclosed, its BDO (classified as intermediates) and ESBR (classified as elastomers) businesses are on the lower end of its five-year historical operating margin profile, while intermediates is on the lower end of its five-year sales-growth profile, as depicted in a presentation by Ashland to the financial community on May 31.

But Alexander noted that ISP is vertically integrated to BDO and has the flexibility to produce it from either petroleum feedstock or natural gas. "This allows for some feedstock arbitrage in this business," he said. Alexander estimates ISP's BDO business generates $15m/year in EBITDA.

Ashland could look to sell its commodity units to meet its debt-reduction objective. This may also include its Valvoline lubricants business, which has sales of around $2.2bn and has perpetually been speculated as being candidate for divestiture. After the close of the ISP deal, it will have a gross debt/EBITDA ratio of around 3.5 times. The firm is seeking to reduce that to 2.0 times.

By: Joseph Chang
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