Commentary: Could Albemarle's planned acquisitiion of Rockwood mark the start of more step-out deals?

17 July 2014 18:27  [Source: ICB]

Albemarle’s planned $6.2bn acquisition of Rockwood Holdings is a step away from the more recent trend of bolt-on deals, and it doesn’t come cheap. Will other such deals follow?

In recent years, chemical company managements have stressed that mergers and acquisitions (M&A) would be sharply focused, with deals either in existing businesses or those closely adjacent. Long gone were the days of M&A for diversification – so-called step-out deals – that were more common in the first half of the 2000s.

Most deals in the global chemical sector have been bolt-ons to expand core businesses. Recent examples include Finland-based Kemira’s planned €153m ($207m) acquisition of Netherlands-based AkzoNobel’s paper chemicals assets annoucned on 8 July, US plastics compounder A. Schulman’s buyout of US-based Ferro’s specialty plastics unit for $91m completed on 1 July, and US-based PPG Industries planned acquisiton of Mexico-based coatings firm Comex for $2.3bn.

But US-based Albemarle’s announced $6.2bn deal to merge with another US specialty chemicals company Rockwood Holdings, is a recognizably different animal. There is no product overlap between the companies. Rather, Albemarle is simply adding two major businesses – lithium and surface treatment from Rockwood – to its to its current bromine and catalysts units.

Granted, it will have #1 or #2 global positions in each its four businesses, but here it is more a case of 2+2=4, versus the oft-cited synergistic M&A formula of 2+2=5.

“We view this as a decisive move to create one of the world’s largest specialty chemical companies with market leading positions across four very attrcative high margin growth businesses,” said Luke Kissam, president and CEO of Albemarle, in a conference call on the deal.

The acquisition by Albemarle will use a combination of 60% cash and 40% stock. Rockwood shareholders would wind up with a 30% stake in Albemarle upon the close of the deal, expected in Q1 of 2015.

And the deal doesn’t come cheap. The EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) multiple comes to 11.3 times, based on expected 2014 pro forma EBITDA adjusted to exclude the pending sale of Rockwood’s pigments business to Huntsman and Rockwood’s acquisition of the remaining 49% stake in its lithium joint venture Talison in May, as well as expected synergies.

Wall Street was not impressed. Shares of Albemarle fell 3.6% on 15 July, the day the deal was announced, and fell again on 16 July, for a 2-day decline of 5.1%.

UBS analyst John Roberts noted that this was the “first significant negative deal reaction in a while”. He called the stock decline “interesting from an industry perspective, as we believe the stock prices of most chemical acquirers have risen this year after announcing an acquisition”.

As the M&A market strengthens and valuations rise, it will be interesting to see whether other companies pursue similar step-out deals.

By: Joseph Chang
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