DJ Dow Purchase Of Celanese Acrylates May Strain Balance Sheet
Dow Jones News Service ~ September 12, 2003 ~ 1:51 pm EST
By David Bogoslaw
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Dow Chemical Co.'s (DOW) deal to buy Celanese AG's (CZ) acrylates business is expected to boost Dow's revenues by roughly $350 million, or less than 1%, and add even more modestly to earnings within the first year.
That's the approximate value of the sales Celanese said the business had last year. Dow will pay Celanese about 150 million euros, or about $168 million, in cash for the assets, which include inventory, intellectual property and technology for various product lines, the German chemicals manufacturer said on a conference call Friday morning.
The acquisition makes sense from the standpoint of vertical integration, as Dow produces propylene, a raw material for acrylates, while Celanese doesn't, said John Roberts, an analyst at the Buckingham Research Group.
"It will be a higher-margin business under Dow, so profitability will improve, " he said. "But it's not large enough to cause earnings changes for Dow's estimates."
The deal is also logical because Dow manufactures superabsorbent polymers, such as those used in disposable diapers and in architectural coatings, the largest end market for acrylates, Roberts added.
He said he owns stock in both companies but that Buckingham doesn't have investment banking ties with either.
Banc of America Securities analyst Kevin McCarthy said he was somewhat surprised by the agreement, however, as "Dow is supposed to be in divestiture mode, not acquisition mode," to reduce debt and shore up its balance sheet.
"Additional leverage could precipitate debt downgrades, increasing the company's cost of capital," he warned in a research note. He cited a widening of the company's bond spreads after a five-notch downgrade of its Union Carbide unit by Moody's Investors Service a week ago on old asbestos concerns.
But the Celanese acquisition shouldn't be taken as an indication that Dow is poised for future acquisitions, said Jim McIlvenny, Dow's vice president of specialty polymers, in an interview with Dow Jones Newswires.
The assets Dow is acquiring will enable it to avoid having to go to the merchant market to buy monomers, the building blocks of the polymers it already produces, McIlvenny explained.
Where Celanese wasn't producing acrylates at capacity, "our synergy will come from operating those assets at capacity and lowering costs by being able to manufacture for cheaper than we can purchase," he said. "This is the best way to lower our costs and become competitive in the global marketplace, and support our sales into merchant markets."
The increased market presence and integrated raw materials position the assets will provide were judged to be worth the cost of taking on additional debt, said Dow spokeswoman Cindy Newman. She wouldn't comment on the chances of debt downgrades by the rating agencies, calling talk of such actions purely speculative.
McCarthy wasn't immediately available to say whether he owns Dow or Celanese stock, but BAS has done investment banking with Dow in the past.
Dow shares were trading at $33.49, up 39 cents, or 1.2%, on volume of about 1.8 million shares, compared with the daily average of 3.7 million shares.
-By David Bogoslaw, Dow Jones Newswires; 201-938-5289; david.bogoslaw@ dowjones.com
(END) Dow Jones Newswires |
