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Mr. Market Is Right About ALB ROC Deal?

|Includes: Albemarle Corporation (ALB), ROC

ALB recently announced a cash and stock deal to merge with ROC. A couple of contributors have written good articles about the deal and why ALB looks like overpaying. I just want to share with you what I have been thinking and would like to know your thoughts on this.

So let us go back to the point just before the deal was announce for a moment. ALB EV was about 6.1B and ROC was about 5.5B, including cash and debt as of Q2 2014. Now the market is valuing ALB 5.1B and ROC about 5.6B. EV of the two combined decreased from 12.6B to 10.6B. Could the same have happened if they announce to raise 3.5B for share buyback?

If the deal go through, ALB could have EBITDA around 900m - 1b and owner earnings around 700m - 800m including interest expenses. ALB could also be able to grow at mid to high single digits more consistently after the integration. A conservative estimate of intrinsic value including debt would be around 12B. Management already have plan in mind to pay down debt after the merger with strong cash flow. There is a lot of upside potential in intrinsic value.

If the deal does not go through (not likely, but a possibility), the market could reward ALB a relief rally back to 70s? Maybe.

What you guys think? I am long ALB.

Disclosure: The author is long ALB.