Shares of Rockwood Holdings (ROC) ended Thursday's trading session 1.2% lower. Rockwood announced yesterday that it will acquire Talison Lithium Limited in a deal valuing the company at $732 million. Shareholders in the Canadian firm were enthusiastic, which sent shares 53% higher toward the offer price of CAD $6.50. Investors in Rockwood are not too enthusiastic yet, despite the strategic rationale of the deal, which will boost Rockwood's long-term potential.
Rockwood announced that it will acquire Talison Lithium in a transaction valuing the firm at $732 million, or CAD $724 million. Rockwood will pay $6.50 per share for Talison, in an equity transaction that is unanimously recommended by Talison's board of directors.
Talison is the world's largest producer of lithium ore. The company operates in a fast-growing market, as lithium-based products are rapidly adopted for batteries in electrical cars and other technologies.
For the first nine months of its fiscal 2012, Talison reported revenues of $85.5 million. It generated a net profit of $15.5 million for the same time period. Assuming annual revenues of $115 million, and profits of $20 million, the deal values the company at 6.3 times annual revenues and 36 times annul earnings.
Chairman and CEO Seife Ghasemi commented on the deal:
The acquisition of Talison is the logical next step in further strengthening our lithium business and enhancing our capabilities. This acquisition will enable us to better serve both our existing global customers as well as Talison's current lithium concentrate customers in China and the rest of the world.
Rockwood will finance the deal with cash available and the issuance of new debt. The deal is not focused on short-term benefits, but increases the strategic long-term profile of the company. The transaction is subject to the normal closing conditions, including regulatory and shareholder approval.
Rockwood reported its second-quarter results for 2012 on Aug. 1. Second-quarter revenues fell 9.4% to $905.6 million. Net income came in at $224.9 million, including a benefit of $125.8 million related to one-time items. Excluding the one-time items, earnings per share came in at $1.24.
For full-year 2012, Rockwood is on track to report annual revenues of $3.5 billion. It is on track to earn $400 million, or almost $5 per share, excluding the one-time benefits. The company operates with $343 million in cash and equivalents. Rockwood has $1.8 billion in short- and long-term debt outstanding, for a net debt position of $1.5 billion.
Currently, the market values Rockwood at $3.6 billion. This values the firm at roughly 1.0 times annual revenues and 9 times annual earnings. The valuation compares to a revenue multiple of 1.1 times for PPG Industries (PPG) and 0.6 times for Dow Chemical (DOW). These competitors trade at 19 times trailing annual earnings.
Rockwood pays a quarterly dividend of $0.35 per share, for an annual dividend yield of 3.0%.
Year to date, shares of Rockwood trade with gains of 20%. Shares of the manufacturer and marketer of specialty chemicals rose to highs of $55 in the spring of this year. Shares fell to the low $40s in the summer amid signs of lower economic growth, resulting in lower commodity prices, including those for specialty products. Shares steadily recovered in recent weeks to current levels around $47 per share.
Over the past five years, Rockwood has seen its share price rise by more than 50%. The company has seen a slight uptick in revenues amid demand for specialty chemicals for the technology and automobile industry, among others. At the same time, the company dramatically improved its profitability, and initiated a dividend this year.
Shareholders in Rockwood are a bit hesitant about the deal. Shares lost little over 1%, or $40 million, of their value in Thursday's session. Part of the reason is the generous premium of $250 million, or over 50%, which Rockwood is willing to pay for Talison.
For long-term investors, it might be worthwhile doing your research on the company. Rockwood made a strategic sound acquisition and operates in a long-term growth industry. Furthermore, it has resources in stable geographic areas and initiated a dividend this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.