The deal further transforms Ashland into a higher-margin, higher-growth specialty chemicals leader, as the ISP transaction bolsters its offerings to the personal care, food and beverage, pharmaceutical and oilfield chemical areas.
Looking at Ashland’s portfolio of businesses, it will weigh more heavily on the specialty side. Indeed, after the close of the deal, expected in September, 74% of its earnings before interest, tax, depreciation and amortization (EBITDA) will be from specialty chemicals businesses. This compares to just 15% in 2004 before it embarked on its transformation.
The company’s margin profile improves substantially, as ISP had a robust EBITDA margin of 22.5% in the 12 months ended March. Ashland’s EBITDA margin for the same period was 12.3% – hardly resembling that of a premier specialty company. On a combined basis, the new Ashland would have an EBITDA margin of 14.5%.
But there’s plenty more the company can do to boost its margin profile into the 20%-plus range, reaching up to the ether of the elite specialty chemical companies.
The deal makes absolute strategic sense for Ashland as the next step in its transformation story, but as chairman and CEO James O’Brien said in an interview last week, “the story is not fully written.”
This could well involve the sale of its lower-margin, more commodity assets. Included that bucket would be its performance materials unit, which includes unsaturated polyester resins (UPS), vinyl ester resins and adhesives. That business had an EBITDA margin of just 6.9% in the 12 months ended March. Its Valvoline lubricants unit would also be a sale candidate.
ISP itself is not 100% specialty, as it has butanediol (BDO) and emulsion styrene-butadiene rubber (ESBR) assets. These were not core assets for ISP, and are not likely to be core to Ashland.
ISP had said for years that it would be open to selling its BDO business if it had the right offer. And it picked up the rubber assets in a distressed sale by bankrupt Ameripol Synpol in 2003 – simply an “opportunistic” acquisition.
Ashland, having sold off its chemical distribution, road paving materials and refining assets through the years, appears set to embark on its next series of asset sales. Besides, it has some debt to pay off.