Germany Evonik’s $3.8bn US acquisition pricey but strategic – bank

LONDON (ICIS)–Evonik is paying a high price for the Air Products specialty & coatings additives business but in the long-term this is good deal that will help strengthen the German specialty chemicals firm’s global position, Baader Bank said on Friday.

The $3.8bn acquisition will give Evonik wider access to the North American and Asian specialty and coatings additives markets, the German investment bank said. It will balance the current high dependence on the European market in these products and help Evonik take advantage of the industrial renaissance in the US.

Moreover, the German specialty chemicals firm will be able to offset volatile results at its feed ingredients unit, nutrition & care, which in the first quarter posted sales and earnings down 15% and 17%, year on year, respectively.

Despite denials from management about a potential acquisition, analysts had already noted in March that Evonik was “in advanced talks” with Air Products regarding the acquisition.

The specialty & coatings additives business is the performance materials division, within the materials technologies segment of the US industrial gases company. In 2015 it generated sales of $1.1bn in 2015 and earnings before interest, tax, depreciation and amortisation (EBITDA) of $242m.

The EBITDA margin for the business in 2015 was 22%. It employs 1,100 workers in 11 production and product development sites worldwide.

“The acquisition [is] not cheap… [But] the strategic fit of the acquisition target is very good,” said Baader Bank’s chemicals equity analyst, Markus Mayer. 

“As currently it is not the time for bargain hunting, the price is high but as the deal has a good return profile we think the price is justified.”

The transaction price is not cheap, agreed at a 2015 enterprise value (EV) to EBITDA ratio of 15.8 times.

However, when Evonik’s expected savings and synergies are applied, the multiple would come down to 10.5 times, according to Baader Bank’s Mayer.

“It is expected that the acquisition will be EPS [earnings per share] accretive for Evonik in the 2017 business year. Including tax benefits and sustainable synergies, the EV/EBITDA 2016E [estimate] multiple is 9.9x [times]. Excluding tax benefits and synergies, the EV/EBITDA 2016E multiple is 15.2x,” he added.

The analyst went on to praise the “highly complementary” nature of Evonik and the acquired business as it will add “critical and highly valuable” assets to the firm’s portfolio in attractive, growing markets like coatings and adhesive additives, high-value polyurethane (PU) foam additives as well as specialty surfactants for industrial cleaning.

“They [Evonik and the acquired business unit] target the same end customers, but with different and complementary products. For instance, Evonik is a leader in PU foam stabilisers while the specialty & coating additives business of Air Products is well positioned in PU foam catalysts,” said Mayer.

“At the same time, by growing in North America and Asia, Evonik is reducing its dependence on the European market and therefore better protecting its own business against economic fluctuations in individual regions.”

Although Evonik is majority owned by Germany’s RAG Foundation, 24.5% of its shares are listed. Baader Bank placed a ‘Hold’ recommendation for those owning some of the shares, while predicting a 12-month share price target of €28, practically unchanged from the closing price on 5 May of €27.95.

On Friday, two hours after the acquisition’s announcement Evonik’s shares were trading up 1.6% to €28.40 by 14:30 London time, compared to their last closing price on 5 May.