Ecolab: Acquisition Of Champion Technologies Is A Perfect Long Term Addition

| About: Ecolab Inc. (ECL)

Ecolab (ECL) announced on Friday that it will acquire Champion Technologies for $2.2 billion. Shares of Ecolab rose more than 4.0% in Friday's trading session.

The Deal

Ecolab announced that it will acquire privately-held Champion Technologies. Champion is a Texas-based energy specialty products and services company delivering products and services to the oil and gas industry. Ecolab will pay for the $2.2 billion acquisition with a mix of 75% of cash and the remainder in stock.

The deal will help the company in its attempt to find new oil and gas opportunities in North America. The operations of both companies are complementary in geography, technology and on a customer base. CEO and Chairman Douglas M. Baker commented on the deal:

This transaction represents a rare opportunity to build on our position in a fast growing market by improving our geographic coverage and technology offerings. As a premier company and proven innovation committed to delivering outstanding technology and service, Champion represents a very attractive business that opportunistically became available, enabling us to acquire an outstanding operator.

Champion Technologies employs over 3,300 workers in over 30 countries. Champion reported annual revenues of $1.2 billion for 2011. No details regarding the profitability of the business were released. The $2.2 billion deal values Champion at 1.8 times annual revenues.

The deal will be accretive to 2013s earnings by $0.12 per share. Synergies will gradually increase to $0.50 per share by 2016, as the annual run-rate of synergies will reach $150 million. Champion's business will be integrated with the Global Energy Service sector.

The deal is accretive to 2013 earnings and further into the future. Ecolab expects to close the deal by year-end, and the deal is subject to customary closing conditions and regulatory approval.


Besides the acquisition, Ecolab also gave an update about the third quarter performance. For the third quarter ending September 30, the company expects to report adjusted earnings per share of $0.87 per share. Previously, the company guided for adjusted third quarter earnings of $0.83-$0.87 per diluted share.

Furthermore, the remainder $280 million outstanding from the company's $1 billion repurchase program will be executed in 2013.


Ecolab ended its second quarter of 2012 with $305 million in cash and equivalents. The company operates with $6.3 billion in short and long term debt, for a net debt position of $6.0 billion.

For the first six months of 2012, Ecolab generated revenues of $5.8 billion. The company reported a net income of $234.2 million, or $0.79 per diluted share. Full year revenues could come in around $12 billion, and the company guides for full year adjusted earnings per share of around $3.00 per share, or $900 million. Net profits are coming in lower on the back of restructuring and integration charges related to the Nalco merger.

Currently the market values Ecolab at $19.4 billion. This values the firm at 1.6 times annual revenues. Shares are trading at 22 times 2012s annual adjusted earnings.

Currently, Ecolab pays a modest quarterly dividend of $0.20 per share for an annual dividend yield of 1.2%.

Investment Thesis

Year to date, shares of Ecolab have risen some 15%. Shares steadily rose from $58 in January to peak at $69 in July of the year. Shares fell back, currently exchanging hands at $66 per share.

Over the past five years, shares have risen some 40%. Shares hit lows of $30 in the beginning of 2009 and have steadily risen to all time highs of $69, a little earlier this summer. Between 2008 and 2012, the company doubled its annual revenues from $6.1 billion to an estimated $12 billion for this year. Adjusted net earnings doubled from $450 million to $900 million over the same period of time.

Ecolab is currently still busy integrating last year's $5.4 billion acquisition of Nalco Holding. The company was not actively looking for new deals, but it acquired Champion after the company's owners wanted to sell. The deal with Champion Technology will boost annual revenues by roughly 10%. The deal values the firm at a 1.8 times annual revenues, the same multiple at which Ecolab trades.

The company did not announce the full year earnings of Champion Technology, but the guidance of $150 million in annual synergies by 2016 implies that the company made a stellar deal.

Investors in Ecolab are enthusiastic and they should be. Champion Technologies would report net earnings of $100 million per annum, assuming the company has similar margins as Ecolab. As such, Ecolab buys $250 million in incremental earnings by 2016 at just $2.2 billion, or 9 times incremental earnings. This compares to a valuation of 22 times earnings for Ecolab itself.

Ecolab is an excellent addition to any long term portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.