Lonza Group AG (LONN), the world’s biggest maker of drug ingredients, agreed to buy Arch Chemicals Inc. (ARJ) for $1.2 billion in cash to create the global leader in the business of killing bacteria and fungi.
Lonza will pay $47.20 a share, 12 percent more than the closing price on July 8, the Basel, Switzerland-based company said in an e-mailed statement today. Arch rose above the offer price, gaining $5.20, or 12 percent, to $47.37 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest climb in 15 months.
Arch’s products are used to kill microbes in swimming pools, protect wood from fungus, deter the growth of mold and mildew in paint and treat dandruff, according to the Norwalk, Connecticut-based company’s website. The deal will make Lonza the leader in a market valued at $10 billion that’s growing as much as 6 percent a year, and reduce its dependence on making pharmaceutical ingredients for drugmakers, the company said.
The acquisition has “a strong strategic rationale” because it allows the two companies to combine complementary businesses and increases Lonza’s sales in emerging markets, Peter Welford, an analyst with Jefferies International Ltd. in London, wrote in a note today.
Lonza rose 60 centimes to 67.40 Swiss francs at 5:30 p.m. local time in Zurich.
The purchase values Arch at as much as 17.2 times forecast earnings per share for 2011, according to Bloomberg calculations. Acquirers of specialty chemical companies paid a median of 19.1 times earnings in the past two years, data compiled by Bloomberg show. Including debt, the acquisition values Arch at $1.4 billion.
The acquisition will create a unit with $1.4 billion in sales, boosting earnings by at least 40 centimes a share in the first year after it’s completed, Lonza said. The company expects cost savings of at least $50 million annually by the second year after the purchase, with $40 million of increased sales. The purchase will result in about $85 million in expenses during the next two years, it said.
“This thing makes a hell of a lot of financial sense for all of the people involved,” Lonza Chief Executive Officer Stefan Borgas said at a briefing with analysts in Zurich. “We can create the clear leader in microbial control in the world by putting our two businesses together.”
The purchase will boost Lonza’s sales in China, India, Brazil and South Africa to $249 million from $35 million now, the company said. The two companies plan to sell Arch’s performance products unit, a division that makes chemicals for coatings, adhesives, antifreeze and cleaning products, Borgas said in the briefing.
Lonza plans to complete the purchase this year, the companies said. Lonza will use bridge loans from banks to pay for Arch, and then refinance those loans using bonds and new loans. The deal was recommended by the boards of both companies, Lonza said.
JPMorgan Chase & Co. and the law firm Jenner & Block LLP advised Lonza. Morgan Stanley and Cravath Swaine & Moore LLP worked for Arch.
July 8 Jump
Arch jumped 11 percent, its biggest gain in 14 months, on July 8, the last trading day before the purchase was announced. Trading volume rose to 1.2 million shares, compared with a daily average of 197,000 shares for the past three months.
“It’s not up to us really to make any speculations about it,” Borgas said of the stock price move on a telephone briefing with reporters. “The fact is there was absolutely no rumor about Arch anywhere, there was absolutely no rumor about Lonza anywhere. We really at the end don’t know what happened.”
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