| NEW YORK
NEW YORK Specialty chemicals maker Ashland Inc (ASH.N) has struck a deal to buy privately held International Specialty Products Inc for $3.2 billion as part of a plan to bolster its already-strong roster of products for the skin care, drug and energy sectors.
Shares of Ashland, best known for its Valvoline oil brand, were up 11.3 percent at a 52-week high in afternoon trading on Tuesday.
Ashland, along with larger rivals Dow Chemical (DOW.N) and BASF (BASFn.DE), have long focused on the specialty chemical sector, which offers high margins and tends to be resilient during recessions. Ashland also makes chemicals and materials for the packaging and water purification industries.
In buying New Jersey-based ISP, Ashland is betting that consumer demand for pharmaceuticals, skin creams, hair gels and cosmetics will only continue to grow.
"We looked at several companies in the past couple of years, and the one that kind of rose to the top was ISP," Ashland Chief Executive James O'Brien told Reuters. "What we like about ISP is that they have very strong technology and patent protection. It was the fit that we wanted."
The deal is a major windfall for the family of Samuel Heyman, a hedge fund manager who spun off ISP from roofing manufacturer GAF Materials Corp in the 1990s.
Heyman died in 2009.
Once the deal closes by September, Ashland expects the deal to increase annual earnings 50 percent to $1.1 billion before interest, taxes and depreciation and amortization. It said it expects margins to increase 2.2 percentage points to 14.5 percent.
The percentage of earnings from specialty chemicals will increase to 74 percent from 15 percent in 2004, when Ashland began changing its business model.
Valvoline, while not technically a specialty chemical product, remains crucial to Ashland and has margins of roughly 20 percent, O'Brien said.
Rumors have circulated for months that Ashland may try to shed the Valvoline brand to focus solely on specialty chemicals.
"Valvoline is not for sale," O'Brien said. "It really fits well from a financial standpoint."
ISP brought in revenue of $1.6 billion and $360 million in EBITDA for its fiscal year that ended March 31.
Nearly half of the revenue came from outside North America. That is in line with the rest of the chemical industry, which has seen much of its growth outside the slow-recovering continent.
The buyout could eventually boost Ashland's earnings per share by 43 cents, Jefferies & Co analyst Laurence Alexander said. Analysts expect fiscal 2011 earnings of $3.74 per share, according to Thomson Reuters I/B/E/S.
Ashland agreed to pay a $413 million break-up fee if the deal collapses.
The deal's announcement marks a major return to duty for Ashland CEO O'Brien, who took several months off to recover from colon surgery.
"I'm feeling much, much better," O'Brien said on Tuesday. "I'm back almost 100 percent."
Ashland hopes to save about $50 million annually by the second year after the deal closes.
It plans to continue to market ISP products with their current brand names. Ashland also is trying to maintain ISP's physical infrastructure, O'Brien said.
"A big part of what we're buying is the research capability," he said. "We will do our best not to disrupt the talent of the corporation so we can retain as many people as possible."
The deal will be funded through cash and financing from Citigroup (C.N), the Bank of Nova Scotia (BNS.TO), Bank of America (BAC.N) Merrill Lynch and US Bancorp (USB.N).
BofA Merrill Lynch acted as financial adviser to Ashland. Moelis & Co advised International Specialty.
Covington, Kentucky-based Ashland bought rival specialty chemicals maker Hercules in 2008 for $2.5 billion cash.
Ashland shares were up $6.69 at $67.78 in afternoon trading on the New York Stock Exchange. The stock has risen 63 percent in the past 52 weeks.
(Reporting by Ernest Scheyder in New York; additional reporting by Krishna N Das in Bangalore; Editing by Saumyadeb Chakrabarty, Dave Zimmerman and Matthew Lewis)