Solvay announces 1,3 mld. USD acquisition of Chemlogics

Solvay announced today it is acquiring privately-held Chemlogics for a total cash consideration of $ 1,345m, or an enterprise value of $ 1.3bn.

Chemlogics posted last twelve months sales of around $ 500m with an EBITDA of around $ 120-125m, or an EBITDA margin of about 24-25%. The company was said to have shown double digit EBITDA growth in the past five years (as we understood due to a combination of healthy top line growth and continued high EBITDA margins).

Chemlogics is mainly active in the oil and gas industry stimulation and cementing segments, with expertise in friction reducers, non-emulsifiers and extraction technologies. As such a significant portion of its business is in the fracking industry. Solvay believes the acquisition is a good fit with its Novecare business, which is mainly active in surfactants, natural polymers and eco-friendly solvents. We believe that with Chemlogics, Solvay also acquires better formulation capabilities. In addition, there is also a good fit between the US customer base from Chemlogics with Solvay’s global customer base.

Chemlogics has three US-based manufacturing sites with an annual capacity exceeding 300kt, eight formulation centers and six research and technical facilities. We understood that the capacity utilization of the manufacturing sites is fairly high.

The acquisition values Chemlogics ast 10.7x EV/EBITDA (EBITDA over past twelve months) or 8.7x if one includes the net present value of the cash tax benefit from intangibles amortization (close to $ 250m). The acquisition is said to be cash and EPS accretive as of the first year. The transaction is subject to customary closing conditions, including anti-trust clearance in the US. The transaction is expected to be closed by year-end 2013.

Although Solvay has available cash to finance the acquisition, Solvay announced it intends to issue about € 1bn hybrid bonds in order to maintain financial flexibility.

Our View:
With this acquisition Solvay positions itself for further growth in the oiland gas industry, especially in the fracking segment. We see the logic behind the acquisition (enlarging product offering, gaining additional formulation capabilities and enlarging customer base), but the offered price is no bargain and will have to be earned back by continued good growth. All in all, this acquisition does not change our investment case fundamentally. We stick to our Accumulate rating and € 120 target price.