In an effort to expand its Global Energy Services franchise,
) has agreed to acquire privately-owned Champion Technologies and
its related company Corsicana Technologies for $2.2 billion, in
cash and stock. This is Ecolab's biggest acquisition since the
company acquired Nalco in 2011 in a cash and stock deal worth
roughly $8 billion.
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Per the terms of the agreement, the mix of the overall
consideration is 25% stock and 75% cash. Ecolab will make a
payment of roughly $1.7 billion and issue 8 million shares of its
common stock. The deal is expected to close by the end of 2012,
subject to standard closing conditions and regulatory clearance.
About Champion Technologies
Houston, Texas-based Champion Technologies is a leading specialty
chemical company. Its integrated offerings are an assimilation of
sustainable chemistry, technology and service for the worldwide oil
and gas industry.
With an employee strength of about 3,300, the company operates in
more than 50 nations. Total sales for Champion Technologies in 2011
came in at $1.2 billion.
Financial Impact of the Acquisition
The acquisition will bolster Ecolab's top as well as bottom line.
It will be accretive to the company's adjusted earnings per share
for 2013 by 12 cents per share. The Zacks Consensus Estimate for
earnings per share for 2013 is $3.52. The accretion is expected to
increase significantly to 50 cents per share through 2016.
The company also expects improvement in EBITDA margins. The
complementary portfolio is expected to result in cost synergies
totaling a run-rate of roughly $150 million by 2015 with an
estimated $50 million savings in operating costs for 2013.
Acquisitions remain Ecolab's core strategy to accelerate growth.
The acquisition of Champion Technologies will strengthen its
foothold in the energy market. Following the acquisition, Ecolab
will also improve its supply chain. This will enable the company to
capitalize on growth opportunities, improve inventory management
and reduce costs.
The buyout will enhance Ecolab's operating scale in North America.
Moreover, the correlated technology and consumer base ensures that
the deal is a strategic fit for the company as the combined venture
will be well-positioned in the global energy market.
Ecolab's Global Energy segment provides comprehensive and
environmentally sustainable solutions to its clients in the
petroleum, global natural gas and petrochemical industries. Ecolab
expects the Global Energy segment to grow in upper-single digits in
the third quarter of 2012. It also believes that the segment will
exhibit healthy growth on the back of mainstay markets for 2012.
The proposed Champion Technologies acquisition will beef up Ecolab
and help the company benefit from the potential represented by one
of the fastest growing industries in the U.S. Following the
closure, the company is slated to become a giant in the oilfield
The acquisition is expected to have minimum effect on Ecolab's
business cycle as the company plans to capitalize on the production
phase of the energy franchise and exploit new vistas of growth
opportunities in the oil and gas industry.
Ecolab envisages incremental returns as reflected in its higher
expected return on invested capital. Despite the high cost, the
deal structure will enable Ecolab to maintain a strong investment
grade balance sheet as the company expects to return to 'A range'
metrics within three years.
For the third quarter of 2012, adjusted earnings are expected to be
87 cents compared with the earlier range of 83 cents to 87 cents.
This revised guidance is in-line with the Zacks Consensus Estimate
for the third quarter and represents year-over-year growth of 16%.
Ecolab envisages reported earnings per share to be 80 cents,
implying one-time charges of 7 cents for the third quarter.
For the second half of the year, the company expects solid free
cash flow, either verging on its net income or exceeding it for the
period. Ecolab is expected to unveil its third quarter 2012 results
on October 30.
St. Paul, Minnesota-based Ecolab serves the food service, food and
beverage processing, healthcare, energy, water treatment and
hospitality markets both in the U.S. as well as internationally.
The company continues to invest in strategic areas such as health
care, food, water and energy and global pest elimination to expand
its business. Management's current emphasis is on product
innovation, sales organization, volume growth, appropriate pricing,
and merger synergies along with the rationalization of operating
With a background of robust growth, Ecolab is poised to gain
momentum via its aggressive strategy of pursuing acquisitions.
Recently, the company inked a definitive agreement to acquire
Mexico-based Quimiproductos S.A. de C.V., a wholly-owned subsidiary
of leading consumer goods company,
Moreover, Ecolab's growth has been buoyed by its strong
international presence, especially in emerging markets like
Asia-Pacific and Latin America. Despite the impressive strong
international exposure, we remain cautious on Ecolab owing to the
aggressive competition from the likes of
Church & Dwight
Raw material price inflation and higher delivered product cost
continue to be headwinds for the company. Moreover, the benefit
from Nalco was mixed in the most recent quarter. Thus, we remain
wary about intangible risks and operational synergies from this new
Ecolab exited the second quarter with cash and cash equivalents of
$304.9 million, up 86.8% from the previous-year quarter. Long-term
debt increased approximately seven-fold to $4,879.2 million. With a
$1.7 billion cash payment for the acquisition of Champion
Technologies, deleveraging remains a cause of concern.
Given Ecolab's history of posting in-line or higher quarterly
earnings, we remain optimistic about the company achieving its
third quarter forecast. We currently have a 'Neutral'
recommendation on Ecolab. The stock carries a Zacks #2 Rank which
translates into a short-term Buy rating.