Ecolab Inc. (ECL), the largest maker of cleaning chemicals for hotels and restaurants, agreed to acquire Nalco Holding Co. (NLC) for $5.4 billion in cash and stock to add industrial water-treatment services.
Ecolab is offering $38.80 a share or 0.7005 of a share for each Nalco share, St. Paul, Minnesota-based Ecolab said today in a statement. Ecolab will use about $1.6 billion in cash and issue about 68.9 million shares to pay for the deal. The bid is 34 percent above Nalco’s closing share price yesterday on the New York Stock Exchange.
Chief Executive Officer Douglas M. Baker is diversifying Ecolab’s base of food-service, hotel and health-care customers with water-treatment sales to energy and industrial companies. The acquisition will help Ecolab expand in a world where 40 percent of the population will be living in water-scarce regions by 2025, Baker said on a conference call.
“It positions us very well to meet the increasing demand for water and the water-scarcity challenges that the world is going to face,” Baker, 52, said on the call.
Nalco is defending itself against lawsuits related to the use of its Corexit dispersant to help clean up the oil spill from BP Plc’s Macondo well in the Gulf of Mexico last year. Baker said BP has provided Naperville, Illinois-based Nalco with “very strong” indemnification against the claims.
Nalco CEO Erik Fyrwald, who will continue to run Nalco units after the merger, said on the call the decision to merge evolved from discussions with Baker about potential collaborations. He declined to say whether he sought competing bids.
Nalco rose $7, or 24 percent, to $35.87 at 4:15 p.m. in New York trading. The shares dropped 9.6 percent this year before today. Ecolab fell $4.08, or 7.4 percent, to $51.31, the biggest drop since December 2008.
“The acquisition would shift Ecolab’s center of gravity towards industrial end markets and away from the restaurant and lodging exposure that investors discuss most often,” Laurence Alexander, a New York-based analyst at Jefferies & Co. who rates both companies “hold,” said today in a report.
Ecolab has indentified $150 million of cost savings from the combination, which was unanimously approved by both companies’ boards. The takeover will add 10 cents to earnings per share in 2012 and “significantly more” in subsequent years, Baker said. Adjusted earnings next year will be about $3 a share for the merged companies, a figure Baker called “conservative.” The deal is expected to close in the fourth quarter, subject to approval by regulators and Nalco investors.
Combined revenue of $11 billion will grow at the upper end of the 6 percent to 8 percent rate that is forecast by both companies, Baker said.
“We expect stronger growth than either company can achieve individually,” Baker said, estimating $500 million in additional annual sales growth from the merger.
The transaction is valued at $8.1 billion, including assumption of $2.7 billion of net debt. Ecolab will refinance Nalco’s debt at a 3.5 percent blended rate including costs, and incremental interest will be about $165 million, Chief Financial Officer Steven L. Fritze said on the call. The combined company will have investment-grade credit ratings, he said.
Moody’s Investors Service, which rates Nalco’s debt Ba2, two levels below investment grade, said it may raise the rating because of the merger. Ecolab, which is rated A2, five levels above junk, may be downgraded, Moody’s said.
Credit-default swaps on Nalco fell 202 basis points to 118 basis points as of 4:11 p.m. in New York, according to broker Phoenix Partners Group. The contracts, which are trading at the lowest since July 2005, according to data provider CMA, typically drop as investor confidence in a company’s creditworthiness improves.
Ecolab is paying 10.9 times Nalco’s earnings before interest, taxes, depreciation and amortization, compared with the 9.7 median multiple of eight comparable deals announced in the past eight years, according to Bloomberg data.
“While possibly a shrewd strategic move, it is a relatively full price being paid for Nalco,” Edward H. Yang, an Austin, Texas-based analyst at Oppenheimer & Co. who rates Ecolab “outperform” and doesn’t rate Nalco, said today in a report. “It is unclear whether Nalco makes Ecolab better.”
Increasing Ecolab’s size will “mute” the impact of Nalco’s exposure to more cyclical end markets, CEO Baker said.
Ecolab would pay Nalco a fee of $275 million to back out of the acquisition, and Nalco would pay a termination fee of $135 million, according to a regulatory filing.
Bank of America Merrill Lynch and law firm Baker & McKenzie advised Ecolab. Goldman Sachs Group Inc. and law firm Cravath Swaine & Moore LLP advised Nalco.
Ecolab was founded as Economics Laboratory in 1924. A maker of rug cleaners for hotels, it became a leading seller of dishwasher detergent in the 1950s, held an initial public offering in 1957 and changed its name to Ecolab in 1986, according to data from Hoover’s Inc.
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