Solvay Looks to Emerging Markets In $4.8 Billion Rhodia Buy

Deal Enables Company to Tap into Specialty Chemicals

04.04.2011 -

Cash-rich Belgian chemicals group Solvay is betting on emerging markets exposure and specialty chemicals with a €3.4 billion ($4.8 billion) cash bid for French group Rhodia.

Monday's deal ends Solvay's year-long search for a takeover after it sold its drugs unit to its U.S. partner Abbott Laboratories in September 2009 for 4.5 billion. The offer of €31.60 per share for Rhodia, which has been recommended by Rhodia's board of directors, means Solvay will still have cash left over from its drugs unit sale.

The deal will significantly lift Solvay's exposure to emerging markets, increasing its percentage of sales from fast-growing economies to 40%. Rhodia is particularly strong in China and Brazil and nearly 50% of its sales came from high-growth regions in 2010.

It will also enable to Solvay tap into higher-margin specialty chemicals, a fertile area for M&A in the chemicals sector as some firms seek more profitable businesses and shift away from traditional low-margin bulk chemicals production.

Dutch group DSM bought U.S. baby food ingredients maker Martek for $1.1 billion and DuPont is sealing the buy-out of Danish food ingredients and enzymes maker Danisco. Dutch paints group AkzoNobel has also been rumored to be a takeover target.

ING analyst Fabian Smeets said Rhodia, which makes engineering plastics used in cars, thickeners for hair and skin products and cellulose acetate for cigarette filters, was probably the cheapest stock in the European chemicals sector.

"Apart from Arkema, Rhodia is probably the only value-enhancing buy the company could do," Smeets said.

Smeets said based on 2011 projections, Solvay is paying 6.3 times EV/EBITDA, or below the European chemicals median multiple of 6.5 times. Assuming synergies, Smeets said the group trades at 4.9 times EV/EBITDA.

A Danish newspaper had earlier reported that Solvay had been outbid by DuPont for Danisco. That deal was agreed on a EV/EBITDA multiple of about 10 times, a multiple that analysts say reflects Danisco's higher-valued food-related businesses.

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Solvay Chief Executive Christian Jourquin told reporters the two groups were complementary in terms of products and markets and the deal would reduce the cyclical nature of their business. The deal also would reduce the exposure of Solvay, which makes soda ash used in glass production and polyvinyl chloride (PVC) for plastic piping, to sluggish construction markets and see it expand in specialty chemicals.

Specialty chemicals usually offer higher margins than commoditized bulk chemicals, but also demand higher R&D costs and wages. Companies, however, can also more easily adjust the capacity and costs of specialty chemicals production.

Rhodia CEO Jean-Pierre Clamadieu will become the combined group's deputy chief executive once the offer closes and will succeed Jourquin in 2012 upon his retirement. Clamadieu said at a press conference in Paris he could not exclude a counter-offer for the company, but added this was unlikely.

Solvay said bolt-on deals were still possible, but added that nothing was planned in the immediate future.
Rhodia shares jumped 48.5% to €31.275, while Solvay shares climbed 1.8%, above a 1.1% rise in the STOXX Europe 600 chemicals index.

Years of restructuring saved Rhodia from collapse after 2000, but its shares still traded at €2 in the first quarter of 2009, rising to about €12 on Feb. 15, 2010, which was when Solvay closed the Abbott deal.

Annual cost synergies, for example as a result of bulk purchasing, will be about €250 million within three years. Job cuts will form a small part of the savings. The acquisition will be earnings accretive from year one.

JP Morgan Cazenove said taking into account synergies, the deal multiple would be an attractive 5.7 times core earnings. Solvay said a tender offer conditional on approval by EU and U.S. anti-trust authorities will be launched in coming days.

"We don't think there will be any competition issues," Solvay spokesman Erik De Leye said.

Morgan Stanley advised Solvay on the deal and Credit Suisse advised Rhodia.