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Eastman Chemical Buys Solutia for $3.4 Billion; Good Growth Synergy Will Creating Favorable Earnings

January 27, 2012 | About:
With a lot of uncertainty and the significant drop in majority of stock prices in the current market, a lot of M&A activity is happened in a diverse range of industries. Just recently, another legacy of Eastman, Eastman Chemical (EMN) is offering to buy Solutia (SOA) in cash and stock for the total value of around $3.4 billion, to leverage the company for the growth of emerging markets, especially the Asia Pacific region. Specifically, SOA stockholders would receive $22 in cash and 0.12 shares of EMN common stock for each share of SOA.

Right after the merger news, SOA has jumped to a new high, currently staying at $27.3 at the time of this writing, valuing the whole company at around $3.3 billion of market capitalization.

At the bottom of 2009, SOA's stock price has plunged to the $1.46 level and gradually increase to $26.35 within just two years; then it shot back down to the nearly $13 level in September last year. Now, with the merger news, the share price has jumped nearly 40%, to $27.3 per share.



SOA is the global manufacturer of materials and specialty chemicals used in a range of consumer and industrial applications, including inter-layers and aftermarket film for automotive and architectural glass, chemicals to promote safety and durability in tires; and encapsulants, coatings and specialty chemicals for electronic, industry and energy solutions. Currently, SOA has 22 manufacturing facilities, seven technical centers and more than 30 sales offices globally. Actually, SOA just emerged from the bankruptcy in 2008, and now it has around 30% of its total revenue coming from the Asia Pacific region, and it is expected to grow that number to a third by 2015.

Jim Rogers, the chairman and CEO of Eastman, has commented on the acquisition: “The acquisition of Solutia is a significant step in our growth strategy and one that I am confident will strengthen Eastman as a top-tier specialty chemical company with strong, stable margins. The addition of Solutia will broaden our geographic reach into emerging geographies, particularly Asia Pacific, establish a powerful combined platform with extensive organic growth opportunities, and expand our portfolio of sustainable products, all of which are consistent with our growth strategy. This transaction is also expected to deliver immediate value to our stockholders in the form of accretion and strong cash generation, as well as create potential upside through the combination of two leading global chemical companies.”

Indeed, this acquisition would be a significant step in EMN’s overall strategy to expand its empire in emerging market, especially to capture the marvelous growth opportunities in Asia Pacific. The company expects to have the annual growth rate in this region to be around 10% for the next several years.

According to EMN, the merger would effectively add to earnings right away, and the combined company can save the costs up to $100 million yearly by the end of 2013. After emerging from bankruptcy in 2008, SOA had consistent operating cash flow, and free cash flow stays at around $250 million and $200 million, respectively.

However, SOA is quite leveraged, with the main asset item being intangibles, taking more than 46% of the total asset, whereas the long-term debt accounts for 37%, and with the D/A ratio for 74%. Jim Rogers, the CEO and chairman of EMN said further of SOA’s fundamentals: "Solutia has transformed itself into a financially strong, innovative performance materials and specialty chemicals company, with enviable market leading positions in virtually every market it serves."

Including the high amount of debt SOA is bearing, the deal would be valued at $4.7 billion, and at the current market valuation, it is valuing SOA at 9.4x P/E, a 250% premium on the book value and 10.6x its operating cash flow.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


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