Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Cytec Industries (CYT) rose some 11% today to $64 a share after the specialty chemical producer agreed to buy Umeco Plc, followed by some upbeat comments about its first quarter.

The Deal
Cytec agreed to pay 550 pence for Umeco Plc, which is a supplier of plane manufacturer Airbus. The price represents a 46% premium to yesterday's closing price. The acquisition values the UK based manufacturer at 274 million pounds ($437 million), making it a sizable acquisition for Cytec.

Under command of CEO Fleming the specialty chemical company is reviewing its strategic options. Last year it already sold its chemical unit to HIG Capital LLC, and the company is contemplating a possible divestiture of its coating unit. The company is right in the middle of a transformation stage trying to increase its presence in aerospace and industrial applications. The acquisition of Umeco fits perfect within this strategy.

The acquisition "greatly improves our presence in the industrial sector, where we see tremendous potential for significant value creation in applications like automotive as customers seek to reduce weight and CO2 emissions", according to Fleming. The deal is expected to close in the third quarter and will be additive to earnings.

First Quarter Outlook
First quarter earnings per share will come in 50% above the consensus estimate (although the company does not specify this estimate) amid continued growth in engineered materials and its process separation segment. Hopeful is also the good performance in the coating segment, which Cytec would possibly spin-off, which could boost the unit's value.

Valuation
Cytec ended 2011 with some $415 million and cash and equivalents, while holding some $635 million in debt, leaving a net debt position of about $220 million. The market values Cytec after today's increase at $2.9 billion, or about 0.9 times annual revenues and 14 times 2011's earnings. On top of that the company pays a quarterly dividend of $0.12, providing an annual dividend yield of 0.8%

Investment Thesis
Long term shareholders have been on a roller coaster owning Cytec's stock. Trading at all time highs in the low seventies by 2007, the stock fell to lows of $10 in 2009 amidst the height of the crisis. The company learned the hard way that its business was extremely exposed to the general economic conditions and made the strategic move to focus on higher margin, less volatile businesses.

This acquisition and the following step of the divesture of its coating unit are big steps within this transformation strategy, which should provide more stable earnings in future years. Investors applaud the acquisition and upbeat comments and send shares to current levels of $64 making a jump towards all time highs of $70 in the near term a very real possibility.

As a result of all the right steps taken, shares have seen a great ride, making it unattractive for me to pick up any shares at this moment on the background of fair valuation multiples in combination with some execution risk.

Source: Cytec Industries Acquisition Confirms Transformation Strategy