(Updates CDS price in fifth-from-last paragraph.)
Jan. 27 (Bloomberg) -- Eastman Chemical Co., the biggest U.S. producer of chemicals from coal, agreed to buy Solutia Inc. for about $3.38 billion to expand in materials for tires and in films used to make windshields and iPads.
Solutia’s investors will receive $22 in cash and 0.12 of an Eastman share for each of their shares, the companies said in a statement today. The cash and stock offer, valuing Solutia shares at $27.65 apiece based on yesterday’s closing price, is 50 percent higher than the 20-day trading average.
Eastman, created when Eastman Kodak Co. spun off its film unit in 1994, said sales in the Asia-Pacific region will nearly double with its acquisition of St. Louis-based Solutia, the former chemical unit of Monsanto Co. The deal will also boost profit margins and sales to the auto market, Eastman Chief Executive Officer Jim Rogers said in a telephone interview.
“The margins are definitely attractive,” Rogers said. Eastman likes Solutia’s “position in each of their key markets being number one, and we like their geographic diversity and what it does to our end-market diversity.”
Solutia rose 41 percent to $27.52 in New York. Eastman, based in Kingsport, Tennessee, climbed 7 percent to $50.41.
The takeover would be the largest in the diversified chemicals sector since April 2009, when Dow Chemical Co. bought chemicals maker Rohm & Haas Co. for more than $16 billion. There have been more than 90 deals of that type in the U.S. in the past five years, according to data compiled by Bloomberg.
Eastman is paying about 8.6 times earnings before interest, taxes, depreciation and amortization for Solutia, Bloomberg data show. That matches the median in a survey of five comparable deals over the past five years and compares with about 12 for the Rohm & Haas takeover.
Eastman will assume Solutia’s debt and borrow about $3.5 billion to finance the deal, Chief Financial Officer Curtis Espeland said on a conference call. Solutia’s net debt was $1.22 billion at the end of last year, it said today in its fourth- quarter earnings statement.
Solutia was spun off from Monsanto in 1997 and emerged from Chapter 11 bankruptcy protection in 2008. Solutia CEO Jeffry Quinn sold the company’s nylon unit in 2009, which at the time was the largest business, and boosted margins. Solutia’s net income more than tripled to $262 million last year on 7.5 percent higher sales.
“Solutia has been a perennial take-out candidate,” Ted Chen, an arbitrage analyst for Jefferies & Co. in New York, said in a report. “The likelihood of a topping bid is low.”
Eastman approached Solutia after its directors last year agreed to consider using its cash flow to fund an acquisition, Rogers said. He declined to say whether there were competing bids. Debt financing was committed by Citigroup Inc. and Barclays Plc, who also are advising Eastman on the deal.
“As we started to boil the ocean, as it were, on acquisitions, Solutia is the one that rose to the top,” Rogers said.
Eight of the top 10 raw materials used by Solutia are made or purchased by Eastman, Mark Costa, an Eastman executive vice president, said on a conference call today. That will contribute to $100 million in cost savings that can be achieved by the end of 2013, Eastman said.
More than half of Solutia’s $2.1 billion of revenue comes from auto applications, mostly tire ingredients and windshield interlayers that prevent shattering, Costa said in the interview. Both companies overlap in supplying architectural and auto markets, Rogers said on the call. Buying Solutia will help increase sales in the Asia-Pacific region by about 10 percent a year, Eastman said.
The deal should immediately be accretive, excluding costs, lifting Eastman’s earnings per share to about $5 for 2012 and to more than $6 in 2013, the company said. It will bring tax benefits to free cash flow equal to about $1 billion through 2013, it said.
Quinn will leave after the deal closes in about six months, Rogers said. Susannah Livingston, a Solutia spokeswoman, didn’t immediately return a call seeking comment.
The use of stock to fund about 20 percent of the purchase price will help Eastman retain it’s investment-grade credit ratings, Rogers said. Standard & Poor’s today affirmed its BBB rating on Eastman’s debt with a stable outlook. Fitch Ratings affirmed its BBB assessment and revised its outlook to negative.
Eastman’s debt will near triple to 2.8 times Ebitda, said Carol Levenson, an analyst at Gimme Credit LLC in Chicago.
‘Pushing the Envelope’
“We consider three-times leverage pushing the envelope for an investment-grade company with this amount of business risk,” Levenson said in a note today.
The cost to protect Eastman’s debt from default for five years surged to the most this year. Credit-default swaps on the company’s debt increased 21.2 basis points to 100.9 basis points as of 4 p.m. in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Deutsche Bank AG and Moelis & Co. provided financial advice to Solutia and Kirkland & Ellis LLP acted as legal counsel. Perella Weinberg Partners LP advised Solutia’s board, which also received an independent evaluation of the company’s long-term plan from Valence Group LLC. Jones Day is Eastman’s legal counsel.
Eastman and Solutia agreed to a break fee of $102 million for the deal, Espeland said on the call.
The value of the deal was calculated using the 122.1 million shares of Solutia that were outstanding as of Sept. 30, according to data compiled by Bloomberg.
--With assistance from Julie Alnwick and Mary Childs in New York. Editors: Simon Casey, Jessica Resnick-Ault
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