Lanxess AG agreed to buy U.S. competitor Chemtura Corp. (NYSE: CHMT) for about $2.1 billion in cash, more than doubling the size of its additives business and accelerating a shift towards specialty chemicals.
Shareholders of the maker of lubricant additives and flame retardants will get $33.50 a share under the terms of deal, Cologne, Germany-based Lanxess said in a statement. The offer is 19 percent higher than Philadelphia-based Chemtura’s close at $28.18 on Sept. 23.
Management Board Chairman Matthias Zachert has been turning his attention to expanding Lanxess’ chemical units since placing its large rubber operations into a joint venture with Saudi Arabian Oil Co. in April. That meshed neatly with the goals of Chemtura chief executive officer Craig Rogerson, who had been evaluating a potential sale since last year after divesting units that make pool chemicals and pesticides.
“Looking at what they are buying, the price and how they are financing it, I would say two thumbs up,” said Lars Hettche, an analyst at Bankhaus Metzler, who recommends buying the stock. “The question is whether they will get it for that price.”
Competition for Chemtura can’t be ruled out, though there aren’t any other companies that are so complementary and have the same synergy potential as Lanxess, Zachert said on a conference call with journalists. “We see the current price offered as a very fair value,” he said.
The planned purchase at a “fair” price demonstrates ongoing consolidation in specialty chemicals and a competing bid is unlikely to emerge, according to Ben Kallo, an analyst at Robert W Baird. Chemtura shareholders will probably vote on the deal at a shareholder meeting in two to three months, Zachert said.
The purchase builds on Lanxess’ additives businesses, allowing it to better compete in the market for lubricant chemicals against Berkshire Hathaway Inc.’s Lubrizol unit, and against flame-retardant producers such as Albemarle Corp. (NYSE: ALB) and Israel Chemicals Ltd. (NYSE: ICL), the company said in the presentation. The purchase adds 1.5 billion euros in sales compared with Lanxess’s current additives unit, which has 850 million euros in revenue.
The deal also takes Lanxess into two new lines: urethane polymers used to coat mining equipment and sporting goods, and organometallics, a type of compound often used as a catalyst. The U.S. company has annual earnings before interest, tax, depreciation, amortization and one-time items of 245 million euros, Lanxess said.
“The Chemtura acquisition is a surprise since it is the largest acquisition of Lanxess so far,” Peter Spengler, an analyst at DZ Bank said in a note to clients. “It fits very well and provides significant synergies and at a reasonable price.” Spengler rates the stock hold.
The planned transaction is worth about 2.4 billion euros including the assumption of Chemtura debt and pension obligations. It adds to a record $193 billion of chemical deals globally in 2016, led by Bayer AG’s proposed acquisition of Monsanto Co. (NYSE: MON) for $65.7 billion. Slow global growth also spurred record deal-making last year, including the December announcement of a merger between the largest U.S. chemical makers, Dow Chemical Co. and DuPont Co.
Lanxess said it will no longer pursue a previously announced 200 million euro buyback program in light of the Chemtura deal. The company said it plans to finance the transaction mainly through senior and hybrid bonds, as well as from existing liquidity. It secured 2 billion euros of bridge financing from JPMorgan Chase & Co. (NYSE: JPM) and Barclays plc, and it plans to arrange long-term borrowings of 1.5 billion euros to 2 billion euros, the company said in a presentation.
Lanxess expects that by 2020 it can reduce costs by 100 million euros a year at the combined company, with a quarter of that savings rate to be achieved next year. Severance and other one-time costs will be about 140 million euros, the company said. Pending approvals from regulators and Chemtura shareholders, the deal would close in the middle of 2017.
Chemtura’s financial adviser was Morgan Stanley, while Davis Polk & Wardwell LLP provided legal advice. Rothschild, JP Morgan Chase & Co. advised Lanxess, with Skadden Arps Slate Meagher & Flom as legal adviser.
-- Additional reporting by Bloomberg's Sheenagh Matthews