Albemarle strikes $6.2 billion deal for N.J. chemical company

Photo provided by Albemarle Corp. -- The kilko lab at Albemarle Corp.'s Process Development Center in Baton Rouge allows the company to develop smaller quantities of material for customers trying to develop a product. Show caption
Photo provided by Albemarle Corp. -- The kilko lab at Albemarle Corp.'s Process Development Center in Baton Rouge allows the company to develop smaller quantities of material for customers trying to develop a product.

Albemarle Corp. acquires chemical company

Baton Rouge-based specialty chemicals maker Albemarle Corp. will pay $6.2 billion in cash and stock for a New Jersey firm that produces the lithium and lithium compounds used in batteries for smartphones and hybrid and electric vehicles.

The acquisition of Princeton, New Jersey-based Rockwood Holdings Inc. will likely mean adding jobs at Albemarle’s shared-services centers in Baton Rouge, Budapest and China, although those details are still being worked out, Albemarle President and Chief Executive Officer Luke Kissam said Tuesday.

The shared-services centers handle back-office operations, such as administrative and support services.

There is little in the way of overlap between Albemarle’s Baton Rouge Process Development Center and those at Rockwood, Kissam said. He doesn’t expect much in the way of impact on Albemarle’s local research and development facility.

“We had been looking for a number of years at the Rockwood business, and if you look at their history over the last four years, they’ve really converted themselves from a holding company to a pure play in lithium and surface treatment,” Kissam said. “Both of those businesses have great growth prospects. Both of those businesses … are very high-margin businesses.”

Lithium and Albemarle’s bromine business have similar technologies, as do Albemarle’s catalysts and Rockwood’s surface treatment business. Those new lines of business, and their similarities, will help Albemarle to drive additional growth.

“All four businesses have high margins, strong competitive positions and attractive long-term growth,” Kissam said.

The deal came together rapidly over the past month. Rockwood’s acquisition will make Albemarle No. 1 or No. 2 in each of the four lines of business. In 2013, lithium accounted for $479 million in revenue; bromines, $1.39 billion; refinery and polyolefin catalysts, $1 billion; and surface treatment, which includes cleaners, coolants, paint strippers and corrosion protection, $770 million.

The addition of lithium and surface treatment brings Albemarle closer to Kissam’s plan to focus on only the most profitable lines of business, as well as Albemarle’s Vision 2015 goal, which included increasing revenue to $5 billion a year. The companies’ 2013 combined revenue was around $4 billion.

Asked what’s next, Kissam said Albemarle’s employees want to know the exact same thing.

“First of all we’ve got to digest what we have before we take another bite,” Kissam said.

For the next two to three years, Albemarle will concentrate on integrating its new properties, running the businesses the way they should be and generating the cash to pay down debt, Kissam said.

Albemarle plans to borrow the cash portion of the deal, about $3.7 billion, from Bank of America Merrill Lynch.

Investors didn’t exactly jump aboard the Albemarle train following the announcement. Albemarle’s shares closed at $70.03, down $2.58 cents, in heavy trading. Close to 14.6 million shares changed hands, 30 times the normal volume. Meanwhile, Rockwood shares jumped $7.44 to close at $83.14.

Oppenheimer & Co. analyst Edward Yang downgraded Albemarle to “Underperform” the S&P 500 over the next 12 to 18 months.

“This looks to be a defensive transaction, given that Albemarle’s EPS (earnings per share) has declined 13 percent from 2011’s peak of $4.88 despite $847 million of stock buybacks,” Yang said in a report.

Credit Suisse analyst John P. McNulty was surprised by Albemarle investors’ muted reaction.

McNulty described the lithium business as Rockwood’s “Crown Jewel” and surface treatment as a cash cow in a report issued Tuesday.

Rockwood controls, directly or indirectly, 55 percent to 60 percent of the global lithium market and owns some of the lowest-cost reserves in the industry. Credit Suisse still expects Rockwood shares to reach $90 for two reasons, McNulty said. As Albemarle investors become more comfortable with Rockwood’s high growth and cash generation, the price for Albemarle’s shares will push higher. The proposed deal offers only a minimal premium and doesn’t prevent other companies from making a play for Rockwood. There may be other potential bidders.

Under the deal, each Rockwood share will be exchanged for $50.65 in cash and 0.48 shares of Albemarle. This works out to $85.53 per share of Rockwood stock, or 13 percent more than the stock closed at Monday. It also means Rockwood shareholders will end up owning about 30 percent of Albemarle.

The strong cash flow the four businesses generate will allow Albemarle to rapidly reduce debt, support ongoing dividend payments and continue investing in the businesses to fuel growth and boost shareholder value, Kissam said. Albemarle won’t have to skimp on its spending on those businesses in order to reduce its debt.

The deal is expected to increase Albemarle’s cash earnings per share, a key measure of financial performance, in the first year. In the second year, the acquisition is expected to increase earnings per share. Albemarle said Rockwood’s acquisition will be “substantially accretive” thereafter.

By 2016, Albemarle also expects to reduce costs by $100 million per year by eliminating duplicate expenses, through increased buying power and the operational economies of scale.

Albemarle said the acquisition will lift three key financial indicators for 2015:

  • Adjusted earnings before interest, taxes, depreciation and amortization will climb to more than $1 billion.
  • Adjusted EBITDA margins will be greater than 25 percent. The higher the margin, the less operating expenses eat into the bottom line, which leads to a more profitable company, according to Investopedia.com.

“This is one of the few businesses we’ve looked at that when we were able to add it together that it actually increased the EBITDA margin of Albemarle,” Kissam said. “So, (it’s a) really high-quality business with an opportunity for greater growth.”

  • Finally, Albemarle expects annual free cash flow of about $500 million.

The boards of directors of both companies have already signed off on the deal. Shareholders and regulators must also approve the transaction. Albemarle expects to close the deal in the first quarter of 2015.

Albemarle also announced that it expects second-quarter earnings in the range of $86 million to $88 million, or $1.08 to $1.11 per share, compared to $79.2 million, or 94 cents per share, a year earlier.

Albemarle said its net sales, adjusted for discontinued operations, will be about $605 million, up from $577 million in the second quarter of 2013. Stronger sales of catalysts used in refining helped generate the improved results.

Albemarle expects to release second-quarter earnings after the stock market closes on July 30, a week later than previously announced.

Follow Ted Griggs on Twitter, @tedgriggsbr