July 20, 2011 / 2:05 AM / 8 years ago

Ecolab eyes energy, food markets with $5.4 billion Nalco buy

BANGALORE/NEW YORK (Reuters) - Ecolab Inc offered to buy Nalco Holding Co for $5.4 billion in its largest ever deal, as the U.S. cleaning and pest-control services company eyes the water treatment services markets for oil drilling and food production.

The demand for water treatment services is booming given the rising pressure on oil and gas drillers to stem groundwater pollution and as the food and beverage industry increases the use of industrial water.

Disasters like the oil spill in the Gulf of Mexico last year, the recent floods in Mississippi and the oil spill from the ruptured pipeline in Montana on Yellowstone River have also led to a rise in demand for water treatment services.

“We really like the customer base that Nalco serves. Oil and gas extraction process increasingly is going to be very water dependent, as you’ve got to go deeper to find it,” Ecolab’s Chief Executive Douglas Baker told Reuters.

Baker said access to healthy water and the ability to manage water treatment was key to the food industry and Nalco would increase its presence in the emerging markets.

However, Ecolab’s investors did not share his enthusiasm for the deal and drove the stock down 9 percent to $50.51 in midday trade on Wednesday. Nalco shares rose 29 percent to $37.34, but were shy of the offer price of $38.80.

Some analysts said that while Ecolab’s bid for Naperville, Illinois-based Nalco would satisfy several strategic goals, investors may debate the cultural fit and synergies of the deal.

“A lot of investors may not be comfortable with the acquisition. Ecolab is a higher-margin business, and they are acquiring a lower-margin business and need investors time to understand the synergies,” said Wedbush Securities analyst David Rose, who said the deal was unexpected.

The deal is expected to close in the fourth quarter, subject to approvals from shareholders and regulators.

FOOD, ENERGY MARKET EXPOSURE

Oppenheimer analyst Edward Yang said Nalco has been struggling with margin compression due to high propylene costs, whereas Ecolab, historically, has not been very sensitive to raw material prices.

Nalco provides chemicals to the food and beverage industries for reverse osmosis and in boiling and cooling towers, while the energy industry relies on the chemicals to minimize environmentally harmful releases.

St. Paul, Minnesota-based Ecolab, whose services range from cleaning glassware to disinfecting operating tables, expects a 20 percent global exposure to the food service business and a 17 percent exposure to the food and energy markets, when the deal closes.

Established in 1928, Nalco went public in 1947 and its ownership changed hands several times since then. Most recently, the Blackstone Group, Apollo Management LP and Goldman Sachs Capital Partners acquired the company in 2003 and took it public again a year later.

Nalco, which is two times the size of its nearest competitor, notched sales of about $4.25 billion in 2010.

CEO Baker said the combined company would record about $11 billion in sales and grow by about $1 billion a year and earn about $3 per share on an adjusted basis in 2012.

CASH AND STOCK DEAL

Nalco shareholders could elect to get 0.7005 Ecolab’s share for each share held, or $38.80 per share in cash — a 34 percent premium to Nalco’s Tuesday closing on the NYSE.

The overall mix of consideration paid to Nalco shareholders will be about 30 percent cash, or about $1.6 billion, and 70 percent by issuing about 68.9 million shares.

Including the assumption of $2.7 billion of Nalco’s debt, the transaction is valued at about $8.1 billion.

The deal values Nalco at 10.9 times 2011 EBITDA, before synergies. Including expected cost savings of about $150 million, Ecolab is paying 9 times EBITDA, compared with where Ecolab is trading today — 11.9 times.

Ecolab has raised its full year 2011 adjusted earnings per share forecast to $2.52-$2.56 from $2.49-$2.53, while Nalco also raised its full-year adjusted earnings outlook to $1.65- $1.70 per share.

If Nalco terminates the deal, it will have to pay $135 million, and if Ecolab ends the deal, it will have to pay Nalco $275 million.

Bank of America Merrill Lynch acted as financial adviser to Ecolab, while Goldman Sachs was financial adviser to Nalco.

Reporting by Vaishnavi Bala in Bangalore and Paritosh Bansal in New York; Editing by Savio D'Souza and Gopakumar Warrier

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