Ashland Inc. (ASH), the maker of Valvoline motor oil, agreed to buy closely held International Specialty Products Inc. for $3.2 billion to tap demand for higher-margin ingredients used in personal-care products and pharmaceuticals.
The all-cash purchase of ISP is expected to add to earnings immediately after closing, which should occur by September, Covington, Kentucky-based Ashland said today in a statement. The acquisition will be funded with cash and committed bank financing, Ashland said.
Ashland Chief Executive Officer James O’Brien has been shedding commodity units and acquiring more profitable businesses since he sold the company’s stake in an oil-refining venture almost six years ago. So-called specialty chemicals will account for 74 percent of profit after the ISP purchase, Ashland said.
“They are getting a high margin, high growth business,” Dmitry Silversteyn, an analyst at Longbow Research who rates Ashland “neutral,” said in a telephone interview from Independence, Ohio. Analysts and investors may assign the shares a higher earnings multiple, Silversteyn said.
Ashland rose $6.74, or 11 percent, to $67.78 at 1:05 p.m. in New York Stock Exchange composite trading. The shares gained 20 percent this year before today.
ISP is the latest specialty-chemical company to be targeted as competitors seek to diversify away from cyclical markets such as plastics and other petroleum-based products. BASF SE last year purchased Cognis for $4.3 billion, followed by Berkshire Hathaway Inc.’s agreement to acquire Lubrizol Corp. for $9 billion three months later.
Ashland bought Hercules Inc. for $2.28 billion in 2008, gaining specialty chemicals used for making paper and water treatment. It sold its 38 percent stake in Marathon Ashland Petroleum for $2.8 billion cash to Marathon Oil Corp. in a deal that closed in 2005. Its paving unit was sold in 2006 to CRH Plc for $1.3 billion and its distribution unit was sold in March to TPG Capital for $930 million.
ISP, based in Wayne, New Jersey, has 2,700 employees serving more than 6,000 customers in 90 countries. It generated sales of $1.6 billion in the past four quarters, with 59 percent of revenue outside North America. Earnings before interest, taxes, depreciation and amortization were $360 million, for an Ebitda margin of about 23 percent, Ashland Chief Financial Officer Lamar Chambers said today on a conference call.
The transaction values ISP at 8.88 times 2010 Ebitda, which compares to a median multiple of 7.34 in 45 similar deals announced worldwide in the past five years, according to data compiled by Bloomberg.
The divestiture of the distribution unit boosts Ashland’s Ebitda to 12.3 percent of sales, from 9.7 percent last year, Chambers said. ISP will further increase the Ebitda margin to 14.5 percent, and profit will rise almost 10 percent, he said.
The ISP purchase provides Ashland with complementary offerings for its hair care, oral care, skin care, pharmaceutical, energy and beverage products, O’Brien said on the call. ISP makes fixatives for hair gels, tartar and gingivitis-control ingredients, anti-wrinkle ingredients, clarifiers for beer and wine, and chemicals that speed the release of drug ingredients.
‘Upgrade Ashland’s Portfolio’
“This transaction should help upgrade Ashland’s portfolio of specialty businesses, focused on less cyclical end markets,” Laurence Alexander, a New York-based analyst at Jefferies & Co., said today in a report. He recommends buying Ashland shares.
ISP was formed by Samuel J. Heyman, who took control of a predecessor company, GAF Corp., in 1983. He spun off ISP in a 1991 public offering and took the company private again in February 2003. An activist shareholder, he forced Union Carbide Corp., acquired later by Dow Chemical Co., to sell off pieces including Eveready batteries, Glad bags and Prestone antifreeze. Hercules thwarted a takeover bid by Heyman in 2003. Heyman died in 2009.
‘A Personal Transaction’
Ashland has been in contact with ISP for years and negotiated the deal privately with the family owners in recent weeks, O’Brien said. He declined in an interview to identify the family because it was “a personal transaction.” Jason Pollack, an ISP spokesman, didn’t immediately return a telephone message seeking comment.
Ashland expects to cut $50 million of annual costs from the combined companies by the second year of the merger. The company agreed to pay a breakup fee of $413 million if it doesn’t complete the transaction.
The transaction won’t expose Ashland to ISP’s asbestos liabilities and the company’s environmental liabilities are “not a big issue,” O’Brien said.
Valvoline’s “great cash flow” and predictable earnings merit a place in Ashland’s portfolio, even though it isn’t a specialty-chemical business, he said. Ashland also doesn’t plan to sell its performance-materials unit, as long as margins improve, he said in the interview.
Citigroup Inc., Bank of America Corp. (BAC), Bank of Nova Scotia and US Bancorp are providing the financing commitments, Ashland said in the statement.
Bank of America Merrill Lynch acted as financial adviser and Cravath, Swaine & Moore LLP acted as legal counsel to Ashland. Moelis & Co. acted as financial adviser and Sullivan & Cromwell LLP acted as legal counsel to ISP.
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