July 11, 2011 / 1:00 PM / 8 years ago

Lonza to buy Arch Chemicals in deal worth $1.2 billion

ZURICH (Reuters) - Drugs industry supplier Lonza LONN.VX is buying U.S.-based Arch Chemicals ARJ.N for some $1.2 billion, making it the world’s largest player in the multi-billion dollar microbial control market, the groups said.

The move, which boosts Lonza’s life science unit and also helps protect the Swiss group against the impact of the strong Swiss franc, puts Lonza in pole position in an area that plays a key role in the fight against disease-causing bacteria.

Microbial control involves destroying microorganisms, which carry disease. This is particularly important in hospitals as hospital-acquired infections are one of the leading causes of death of patients, as well as for ensuring food products are safe.

The rather fragmented microbial control market, currently valued at around $10 billion, is growing at some 4 to 6 percent per year, while demand for products to help prevent hospital-acquired infections or germs spreading in swimming pools is growing at a stronger pace.

Lonza will pay $47.20 per share for Arch Chemicals in cash, a premium of 36.7 percent to the U.S. group’s average closing price over the last 30 trading days, and the bid has the unanimous backing of Arch Chemical’s board.

At 0948 GMT, shares in Lonza were trading near flat, paring earlier losses and outperforming the 0.8 percent drop in the Swiss blue-chip market .SSMI despite some worries the price was high and it could be dilutive to Lonza's business model.

Based on the offer price for all the outstanding shares, Arch Chemicals’ enterprise value would be around $1.4 billion. Arch Chemicals had sales of around $1.4 billion in 2010, the groups said on Monday.

Together the two companies would have had sales of 4.1 billion Swiss francs ($4.89 billion) in 2010, with $1.6 billion in the life science market.

PRICE IS RIGHT

Lonza, which will finance the deal through debt, is expecting to complete the buy before the end of 2011.

“We are paying a 9.1 multiple on the last 12 months’ EBITDA (earnings before interest tax, depreciation and assets), in line with the sector multiples. This is also pre-synergy. After synergies, the multiple is 7.2 times EBITDA,” Lonza chief executive Stefan Borgas told Reuters.

Lonza is eyeing cost synergies of at least $50 million per year by the second year and the deal is expected to be earnings per share accretive in the first year, the groups said.

The Basel-based group will make job cuts in administration and corporate functions, Borgas said, but he added it is still too early to say how many staff will be affected.

“In our view, the combination clearly makes sense on the financial level and helps Lonza to respond to the pressures in its microbial control business, which had suffered in recent years from a shrinking market for wood protection products used in the construction industry,” Sarasin analyst David Kaegi said.

“On the downside, the deal also dilutes Lonza’s biotech investment case, which was so far regarded as the core of Lonza and which has seen gradual improvements over the last few quarters,” Kaegi said.

EMERGING MARKETS

The deal will boost Lonza’s business in the fastest-growing markets of China and India, as well as Brazil and South Africa, where the group is not present at all, Borgas said.

Key customers also include players like Procter & Gamble (PG.N) and Unilever (ULVR.L), who need to make sure products like shampoos and creams are free of any harmful microbes.

There is growing demand for more information about the safety of products and their effects on health and the environment as well as for more effective ways to prevent the spread of infectious diseases like bird flu, swine flu and SARS.

Population growth and movement, urbanization, more travel and transportation of goods is also boosting demand for microbial control.

Borgas said on a conference call the group was unlikely to go for any larger acquisitions for the next two years, but he said the group was still on the prowl for bolt-on buys.

($1=.8387 Swiss Franc)

Editing by Hans-Juergen Peters and Mike Nesbit

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