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Ashland Could Rise Like A Phoenix

Every chemical company needs a good catalyst. Ashland (ASH) is getting one in the form of $2.7 billion in cash. The money, expected late this year, will come from a sale to Marathon Oil (MRD) of its 38% stake in their joint venture, Marathon Ashland Petroleum. Ashland, after paying all its debts, will have $770 million left to seed growth in specialty chemicals. Ann Kohler of Independent Research Group says the result will transform this amalgamation of oil, chemicals, and road building into an attractive growth story with stronger cash flows and a higher valuation. Her target for the stock is 66, based, conservatively, on $770 million plus a valuation of its existing businesses at eight times 2005 earnings before interest, taxes, depreciation, and amortization of $8 a share. Better returns from investing the cash would drive the stock higher. The shares have already climbed from 44 four weeks ago to 52 as the market has warmed to the prospect. One risk is the Internal Revenue Service might say the deal can't go off tax-free. That could kill it. But Robert Willens, tax expert at Lehman Brothers, says that as complex as the deal is, it meets IRS tests.

Gene Marcial is away for several weeks.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By David Henry

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