Rockwood Seen as Deal Target After Asset Sales: Real M&A
Rockwood Holdings Inc. (ROC), the world’s largest producer of lithium products, may become a takeover target after agreeing to sell almost $4 billion of businesses this year.
Rockwood’s deal last week to sell its volatile titanium-dioxide assets to Huntsman Corp. may spur takeover interest for the rest of the $5 billion company, Goldman Sachs Group Inc. said. With Rockwood narrowing its focus to its two fastest-growing units -- lithium for rechargeable batteries and surface treatments applied to cars and airplanes -- chemical makers such as BASF SE and DuPont Co. (DD) would be among the most logical suitors, according to First Analysis Securities Corp.
“Rockwood’s days as an independent company are probably numbered,” Michael Harrison, a Chicago-based analyst at First Analysis, said in a phone interview. Now that Rockwood is down to just two businesses, “it seems to me that it’s a more attractive takeout candidate. The lithium business is something that I think a lot of chemical and energy companies would be interested in.”
By slimming down, Princeton, New Jersey-based Rockwood is removing businesses that were hampering its valuation. The stock reached an eight-year high last week and is up 35 percent this year through yesterday. Now the company’s $7.1 billion enterprise value is almost 12 times analysts’ average estimate for next year’s earnings before interest, taxes, depreciation and amortization, topping the median multiple of 9.2 for its specialty-chemical peers, according to data compiled by Bloomberg.
Nahla Azmy, a spokeswoman for Rockwood, didn’t respond to a phone call or e-mail seeking comment.
Chairman and Chief Executive Officer Seifi Ghasemi has been moving Rockwood away from the production of commodity chemicals to help boost its valuation. On Sept. 4, the company completed the sale of its ceramics business CeramTec to buyout firm Cinven Ltd. for 1.49 billion euros ($2 billion).
It’s also selling the unit that makes clay-based additives -- used in products such as laundry detergent, carpet freshener and industrial coatings -- for $635 million to Germany’s Altana AG. Altana had been looking at acquiring parts of Rockwood after abandoning a bid for the entire company in 2008.
This month, Rockwood agreed to sell its titanium-dioxide assets to Huntsman for $1.1 billion, plus the assumption of about $225 million in unfunded pension liabilities. Salt Lake City-based Huntsman is creating the world’s second-largest producer of titanium dioxide, also known by its chemical formula TiO2 and used as a whitener in paint and toothpaste.
“While the volatile TiO2 business might otherwise be seen as a negative for a chemical company interested in acquiring its valuable specialty portfolio, we believe Rockwood’s proposed exit could potentially boost M&A interest for the remaining units,” Robert Koort, a Houston-based analyst at Goldman Sachs, wrote in a report dated Sept. 19.
The divestitures will leave Rockwood with a unit that sells lithium, a metal used to make long-lasting batteries for laptops, mobile phones and electric vehicles, and another business that makes surface treatments to protect metals from corrosion. The lithium side had about $182 million in adjusted Ebitda in 2012, while surface treatments earned $155 million, according to a regulatory filing.
Ghasemi, Rockwood’s CEO, said at an analyst conference this month that lithium demand may double over the next few years as more people buy electric cars. Excluding automotive applications, he said Rockwood’s lithium business will continue to grow 7 percent to 10 percent a year.
After the announcement of the deal with Huntsman, shares of Rockwood closed on Sept. 18 at $68.69, the highest since its 2005 initial public offering. The stock is the fifth-best performer in the Bloomberg Industries Global Specialty Chemicals Index this year, data compiled by Bloomberg show. Rockwood ended yesterday at $66.88.
Today, Rockwood rose 2 percent to $68.23, the fourth-biggest gain in the Bloomberg Industries index.
Analysts see the stock climbing to about $75 in the next 12 months, according to the average of estimates compiled by Bloomberg. In April, activist hedge fund Jana Partners LLC said Rockwood could attract bids after selling units and may be valued at $80 a share in a takeover.
A Rockwood “made up of lithium and surface treatments could make a very attractive takeover candidate for large multinational chemical names” such as BASF (BAS), Albemarle Corp. (ALB) and Soc. Quimica y Minera de Chile SA, known as SQM, Jana said in a letter to investors at the time.
Jana, which had a 3.5 percent stake at the end of last year, trimmed its position after the stock gained on the announcement of Rockwood’s intention to exit certain businesses, the letter said. The firm no longer owns shares, data compiled by Bloomberg show.
Diversified chemical companies with numerous business lines, such as BASF, the world’s biggest chemical maker, and DuPont, the biggest in the U.S. by market value, are among those that could look at buying Rockwood after it completes the divestitures, Harrison of First Analysis said. Ludwigshafen, Germany-based BASF had a market capitalization of 66 billion euros ($90 billion) yesterday, while DuPont’s was $55 billion.
Similar to Rockwood, DuPont is shifting away from traditional commodity chemical products toward higher-margin businesses. Founded in 1802 to make gunpowder, the Wilmington, Delaware-based company sells products ranging from pesticides and genetically modified corn seeds to Corian countertops and Kevlar anti-ballistic fiber.
Representatives for BASF, DuPont, Albemarle and SQM declined to comment on potential takeover interest in Rockwood.
While BASF had 2.25 billion euros ($2.92 billion) in cash and equivalents as of June, CEO Kurt Bock has shown a penchant for smaller technology-driven deals over riskier big-ticket purchases. His biggest acquisition since taking the helm in 2011 was Becker Underwood Inc., a maker of biological seed treatments, for $1.02 billion.
Private-equity suitors shouldn’t be ruled out given Rockwood’s history with buyout firms, yet they may not be willing to offer a high enough takeout price, Harrison said. New York-based KKR & Co. (KKR) formed Rockwood more than a decade ago through the merger of Dynamit Nobel and businesses it acquired from Laporte Plc, then took the company public in 2005.
“Not everyone could do a deal of this size, so it’d probably have to be one of the larger chemical companies,” Chris Shaw, a New York-based analyst at Monness, Crespi, Hardt & Co., said in a phone interview. “But it’s definitely more attractive” for buyers after the divestitures, he said.
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