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Albemarle to buy Rockwood Holdings for $6.2 billion
2:01 PM MDT | July 18, 2014 | —Robert Westervelt and Ian Young
Albemarle has reached an agreement to acquire Rockwood Holdings, a leading producer of lithium and surface treatment chemicals, for $6.2 billion in cash and stock in a bid to recharge revenue and earnings growth.
The deal gives Albemarle, a producer of catalysts and bromine-based derivatives, first or second position across four high-margin specialty chemical segments that are all growing at or faster than GDP. “All four businesses have high margins, strong competitive positions, and attractive long-term growth,” says Albemarle president and CEO Luke Kissam.
Kissam tells CW that Rockwood had been on its acquisition target list for a few years and that completed and announced divestments had made the company even more attractive. “The business became more of a pure play in lithium, which looks a lot like the bromine business to me, and surface treatment, which is driven by innovation and high-touch customer focus, like our catalyst business,” Kissam says. “Rockwood was also one of the few businesses that actually increases our margins.”
Lithium drives growth
Kissam says that lithium, with growth forecast at two to three times GDP, likely leads growth for Albemarle but that all four segments have strong growth prospects. Catalysts and surface treatment should grow at one or two times GDP, while bromine should track GDP growth, Albemarle says.
Each outstanding share of Rockwood common stock will be exchanged for $50.65/share in cash and 0.4803 of a share of Albemarle common stock. The transaction values Rockwood at $85.53/share, a 13% premium based on the closing price of shares on 14 July, the day before the deal was announced. Albemarle shareholders will own approximately 70% of the combined company, and Rockwood stockholders will own 30%. The transaction is subject to shareholder and regulatory approvals and is expected to close in the first quarter of 2015. Albemarle says the deal values Rockwood at 11.3 times its pro forma 2014 Ebitda, adjusted to include $100 million in expected cost savings.
Rockwood chairman and CEO Seifi Ghasemi stepped down as CEO in June to take the helm at Air Products, which appears to have been a catalyst for the deal. “Because we had done all of the homework previously on Rockwood, we were able to move pretty quickly, and things really came together over the last month,” Kissam says.
For 2018, Albemarle expects revenues for the combined company of $5.0 billion, Ebitda of $1.5 billion, and Ebitda margins of 29.9%, according to documents filed with SEC. These correspond to revenue growth of 5%/year and Ebitda growth of 10%/year between 2014 and 2018. The document also notes that, while Albemarle as a standalone business had revenue growth of 3.8%/year between 2010 and 2014, estimated Ebitda in full-year 2014 would be $550 million, essentially flat with 2010 levels and down from a peak of $688 million in 2012. Weakness in bromine has hurt Albemarle margins.
Kissam expresses confidence in Albemarle’s ability to grow margins over the next five years, citing current pro forma Ebitda margins of 25% for the combined company and the expected benefit from improved asset use. Recent investments in bromine and catalysts position both businesses to meet demand growth with limited additional capital needs, and Rockwood’s surface treatment business is a “capital light” business, Kissam says. “The only major capital investment that we will need in foreseeable future is in the event we elect to build an additional lithium hydroxide or lithium carbonate plant,” Kissam says. “We ought to get tremendous margin leverage over next [few] years as growth comes through. As long as we continue to innovate and be efficient in how we go to market, I am confident in our ability to achieve high-20% margins.”
Kissam says that Rockwood will make Albemarle a “larger, stronger company” while increasing diversity across end markets, geographies, and technologies. “That will make us less susceptible to the upward or downward shifts that one segment can disproportionately have on... results,” Kissam says.
Albemarle says the deal will add to cash earnings per share (EPS) in the first year after close and adjusted EPS in the second year, and will be “substantially accretive thereafter.”
Both Albemarle and Rockwood have taken steps to narrow their portfolios in the past year. Rockwood has announced plans to sell seven businesses since early 2013, leaving it focused on lithium and surface treatment. The total enterprise value of the completed and announced deals has been nearly $4.00 billion, including the sale of advanced ceramics business for €1.49 billion ($2.02 billion), clay-based additives for $635 million, and titanium dioxide (TiO2) pigments and other businesses for $1.30 billion. The sale of Rockwood’s TiO2 business to Huntsman is pending and expected to close by the end of the third quarter. Albemarle signed a definitive agreement to sell its antioxidants, ibuprofen, and propofol businesses to SI Group in April. That deal is expected to close later in 2014.