Ashland Pushed by Jana Seen Higher With Split : Real M&A

Ashland Inc., which soared to a record this month after activist Jana Partners LLC disclosed a stake in the company, stands to boost the lowest valuation in the specialty-chemicals industry by breaking itself up.

Ashland’s unit that produces chemicals for water treatment and its division that makes resins and adhesives are undermining profitability and shedding them could unlock more value, said Deutsche Bank AG. After gaining 13 percent since last month on optimism Jana’s involvement will speed up efforts to streamline the business, the Covington, Kentucky-based company still trades at a cheaper multiple to this year’s projected profit than any of its U.S. peers, according to data compiled by Bloomberg.

“The valuation is being dragged down by these lower-growth, lower-margin, lower-quality businesses,” David Begleiter, an analyst at Deutsche Bank in New York, said in a telephone interview. “What Jana wants is what the company wants and what most investors want, which is a more focused portfolio. Ashland would have gotten there on their own, but I think Jana will act as an accelerant towards that longer-term goal.”

Ashland, a maker of products from Valvoline motor lubricant to paint thickener, is worth at least 24 percent more broken up, according to the average of four analysts’ estimates compiled by Bloomberg. Argus Research Co. said BASF SE could be lured to the $7 billion company’s water-treatment chemicals division, while Monness, Crespi, Hardt & Co. said that business and the materials unit that makes resins may appeal to private-equity firms. Ashland also could sell the Valvoline business to an oil producer or consumer-products conglomerate such as Procter & Gamble Co., First Analysis Securities Corp. said.

Deal History

“We have a history of acquiring and divesting businesses to position the company for growth,” Gary Rhodes, an Ashland spokesman, wrote in an e-mail in response to questions regarding whether the company would be open to selling assets. “Our intent is to continue looking for opportunities to create value.”

Ashland Chairman and Chief Executive Officer James O’Brien has completed more than $13 billion of divestitures and acquisitions since 2002, including the $3.2 billion purchase of closely held International Specialty Products Inc. in 2011, according to data compiled by Bloomberg. The company currently has four main divisions: specialty ingredients, the Valvoline unit, water technologies and performance materials -- which makes synthetic rubber and composite resins for truck bed liners.

Jana Stake

Jana disclosed April 11 it had acquired a 7.4 percent stake and had spoken to management about ways to boost the “undervalued” shares. While Jana hasn’t specified a course of action, its stake is likely to call attention to weaker businesses and may accelerate asset sales, according to James Harlow, an analyst at Charlotte-based Novare Capital Management.

Ashland “has always been kind of a laggard on the multiple side,” Harlow, whose firm oversees more than $600 million, including Ashland shares, said in a phone interview. “There’s some value to unlock, to streamline the company into a more of the specialized chemicals, which is a higher-multiple, higher-margin business.”

Charles Penner, a partner at New York-based Jana, declined to comment on whether the fund would seek a breakup of Ashland or support asset sales.

Ashland shares have gained 13 percent since Jana disclosed its stake and on May 15 closed at a record $90.02. Still, the company trades at a multiple of 13.5 times this year’s projected profit, less than any U.S. specialty-chemical maker valued at more than $1 billion, according to data compiled by Bloomberg. The company’s net income margin in the last 12 months of 0.4 percent was the lowest in the group, the data show.

Today, Ashland shares gained 0.6 percent to $89.31.

Higher Value

Based on the sum of its parts, Ashland should be valued at about $110 a share, 24 percent more than its closing price last week of $88.77 and 40 percent more than before Jana disclosed its stake, according to the average of four analysts’ estimates compiled by Bloomberg. The estimates range from $99.05 to $125 a share.

Ashland’s water-technologies division, which accounted for about 21 percent of the company’s $8.2 billion in revenue last year, is the most likely to be sold, according to Bill Selesky, a New York-based analyst at Argus.

“The water technologies division is the one that’s been subpar,” Selesky said in a phone interview. Selling it “would obviously be a positive catalyst for the company.”

BASF, the world’s biggest chemical maker, may be interested in purchasing the unit to add to its water-treatment business, Selesky said. Thomas Nonnast, a spokesman for Ludwigshafen, Germany-based BASF, said the company doesn’t comment on speculation.

Materials Unit

The performance-materials unit may also be on the block because of its low margins, Deutsche Bank’s Begleiter said. That business made up 19 percent of Ashland’s revenue last year.

Private-equity firms would be logical buyers of both the performance-materials and water-technologies divisions given their recent interest in the industry, according to Chris Shaw, a New York-based analyst at Monness Crespi. Permira Advisers LLP and Blackstone Group LP are among bidders who advanced into the second round to buy Rockwood Holdings Inc.’s German ceramics unit, people familiar with the matter said last month.

“There is definitely money out there for these kinds of assets,” Shaw said in a phone interview. He estimates that the water-technologies business may fetch about $1.3 billion in a sale based on similar transactions.

Companies such as industrial adhesives producer H.B. Fuller Co. and Henkel AG, the maker of Dial soap, may also be interested in buying the performance-materials division, said Michael Harrison, a Chicago-based analyst at First Analysis.

Valvoline Sale

Another option for unlocking value at Ashland would be to sell the Valvoline auto-lubricants division, which includes more than 860 oil-change shops and made up 25 percent of sales last year, Harrison said.

“The Valvoline piece clearly isn’t a true fit with the specialty chemical core and I think could fetch a pretty nice valuation,” he said in a phone interview. “It’s a very strong brand.”

Major oil producers that lack a lubricants division could seek to purchase Valvoline to better compete with Exxon Mobil Corp.’s Mobil engine oils and BP Plc’s Castrol products, while a consumer-goods conglomerate such as P&G may also find the unit attractive, Harrison said.

Representatives for Dusseldorf-based Henkel and Cincinnati-based P&G declined to comment. Maximillian Marcy, a spokesman for St. Paul, Minnesota-based H.B. Fuller, didn’t immediately respond to a phone message and e-mail seeking comment.

Ashland also could spin off the Valvoline unit to shareholders, Deutsche Bank’s Begleiter said.

Limited Gains?

Even if Jana urges Ashland to shed assets, it hasn’t always been successful in getting companies to heed its advice. The fund wanted Calgary-based Agrium Inc. to spin off its retail agricultural outlets. Agrium rebuffed the proposal and investors last month rejected Jana’s five board nominees.

While divesting assets would be “a valid strategic” step, tax expenses and other costs may limit the benefits, according to Dmitry Silversteyn, an Independence, Ohio-based analyst at Longbow Research.

Shedding lower-margin divisions “will make the rest of the company look better but not by as much as people think,” Silversteyn said in a phone interview.

Ashland’s stock has also jumped so much on optimism that Jana will push for a breakup that asset sales may not yield significant further gains, said Sarah Hunt, an associate fund manager and analyst at Purchase, New York-based Alpine Woods Capital Investors LLC, which holds shares of Ashland.

Cash Hoards

Still, potential buyers may be more willing to pay up for assets amid a record buildup of corporate cash and marketable securities as Federal Reserve monetary policies keep interest rates at near-record lows, Hunt said.

“Everyone is sitting on what is essentially free money and they’re trying to figure out how to put it to work,” Hunt said in a phone interview. “That gives you more room to sell assets at a better price than you might be able to otherwise.”

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