BUY OR SELL-Is the M&A risk priced into Solvay shares?

AMSTERDAM Mon Feb 7, 2011 10:58am EST

AMSTERDAM Feb 7 (Reuters) - Belgian chemicals and plastics maker Solvay (SOLB.BR) pocketed 4.5 billion euros ($6.1 billion) in cash from the sale of its drugs unit last year and now faces a dilemma over how to invest that money.

The company says it wants to invest in industrial assets, yet last month a Danish newspaper said it was outbid by DuPont (DD.N) in an auction of Danish enzymes group Danisco DCO.CO.

There is also talk Solvay's management board is split: to opt for smaller deals and return cash to shareholders, or snare one large acquisition.

Latest Thomson Reuters Starmine data shows four analysts with a "buy" rating on Solvay and two with a "sell", while 15 have a "hold", reflecting deep uncertainty about its future.

The average price target is 83.11 euros, representing upside of only 7.6 percent to Friday's close of 77.21 euros.

BUY

Bernard Hanssens, Bank Degroof analyst, rates Solvay "accumulate" with a target of 88 euros. He says it has boosted profitability in the past by paying only a realistic deal price.

He pointed to a polymers deal with BP (BP.L) in 2000 and to Solvay's buyout of Fournier Pharma in 2005, which paved the way to selling its own pharma business last year.

Other analysts say chemicals companies have become more disciplined about M&A, pointing to the 6 times EV/EBITDA multiple that Germany's Lanxess (LXSG.DE) paid for Dutch DSM's (DSMN.AS) elastomers business in December.

One analyst, who declined to be identified but who has an "outperform" rating on DSM, said the acquisition risk is priced into Solvay shares.

Hanssens says the fact Solvay did not make a public bid for Danisco also shows it "is not prepared to launch a hostile bid".

The company renewed its share buyback plan last month, suggesting no large acquisitions are imminent.

SELL

Though Solvay looks cheap at about 4 times estimated EV/EBITDA, against 6 for Lanxess and 5.4 for BASF (BASFn.DE), Deutsche Bank analyst Tim Jones does not see enough upside to have a "buy" rating, because of the acquisition risk.

He forecasts a good fourth quarter -- recurring operating profit up 61 percent with only limited seasonal slowdown in demand -- but added Solvay's outlook will likely be conservative given cost inflation and general economic uncertainty.

"Downside risks include a more dilutive acquisition than expected," Jones said.

Solvay's pharma unit was priced at an EV/EBITDA multiple of roughly 8. The Danisco deal was on a multiple of about 10 and Belgian metals and materials company Umicore (UMI.BR), which some see as a potential target for Solvay, trades on 11 times.

Asset prices have steadily risen since Solvay closed its drugs unit sale in February 2010. Petercam analyst Jan van den Bossche said that poses difficulties for Solvay, which he added has a war chest of between 4 billion and 6 billion euros.

"There are a limited number of companies of that value," Van den Bossche said. "Time is running out."

($1=.7380 Euro)

(Reporting by Aaron Gray-Block; Editing by Sara Webb)

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