Corporate Restructuring – Hercules Revamps To Reduce Debt

Debt-strapped Hercules Inc. is cleaning house to support a major shift in strategy, starting with an innovative, club-deal divestiture to jump-start the restructuring plan and monetize a non-core business. Hercules plans to refocus on growing its pulp and paper, BetzDearborn water treatment, and Aqualon specialty chemicals operations, shed three businesses outside of that core, and generate cash for chopping the debt that has been in the neighborhood of $2.5 billion. For openers, the Wilmington, Del.-based chemicals company, in concert with Lehman Brothers, worked out a complex but strategically intriguing deal to create a new company that produces food gums, or thickening agents and stabilizers in food products. That’s only the kickoff. Hercules said it was negotiating the sale of its resins division with an unidentified strategic buyer and looking at options for its FiberVisions polymers unit. If it all works out, Hercules spokeswoman Susan Towers said, the company will raise about $1 billion for paring debt and slashing its debt-to-equity ratio to 40% from the current 57% by the end of 2000. Moving the food gums operation outside of Hercules’ mainstream involved dollops of merger, disposition, and monetization elements. A new business created by Hercules and Lehman acquired the rival Kelco biogums operation of Monsanto Co. for $685 million and then folded in the Hercules food gums business to create a firm that, with $450 million in annual sales, is double the size of either constituent. In return for the contribution, Hercules received $550 million in cash that can be earmarked for whittling the debt. Lehman owns 72% of the new entity and Hercules has a 28% stake. Why the convoluted route? Twisty as it was, the format created more value for Hercules than a one-off sale of a relatively small operation, Tower said. The combined gums business not only enjoys greater size and market share, she said, but can offer a wider array of products and use a diversity of technologies. The timing also was right for bringing Monsanto into the mix. The St. Louis-based biotech company has been selling off several old-line businesses as it preps for a merger with Pharmacia & Upjohn Inc. in a $50 billion transaction. Among the most recent sell-offs are the tabletop (consumer products) business of the popular Equal artificial sweetener line, which was dealt to an investment group for $570 million. The sale pointed up the metamorphoses that many businesses undergo. At one time Equal was a growth star which Monsanto obtained when it acquired developer G.D. Searle in the mid-1980s. More recently, a slowing of growth and intense competition among producers have commoditized the sweetener market. Hercules stock closed February 29 at 16-1/2, barely above the 16-1/16 low point of a 52-week range which included a high of 40-11/16.