Chemicals maker Ashland buys peer Hercules for $3.3 billion

Marking the second deal in the chemicals industry in as many days, American chemical distributor Ashland Inc. said it's going to acquire peer Hercules Inc. for about $3.3 billion in cash and stock. This comes only a day after Dow Chemical's $18.8 billion proposed acquisition of Rohm & Haas, the second largest such deal in the past one year. (See: Dow Chemical acquires Rohm & Haas for $18.8 billion)

Ashland will pay $23.01 for each share of Hercules, 38 per cent more than yesterday's close. The price includes $18.60 a share in cash and 0.093 of an Ashland share, Covington, Kentucky-based Ashland said today in a statement. The agreement includes $700 million in net debt financing from Bank of America and Scotia Capital.

The combined company will have sales of $10 billion, while helping to reduce earnings volatility and bolster margins, Ashland said. It expects to realize run-rate cost savings of at least $50 million by the third year following completion. The deal should be completed by the end of 2008.

The acquisition would give Ashland a major presence in the water treatment arena that primarily services the pulp and paper industry. It would increase the company's portfolio of specialty additives and ingredients, besides reducing the company's earnings volatility and improving cash flow.

It would create three businesses - specialty additives and ingredients, paper and water technologies, and specialty resins, Ashland CEO James O'Brien said in a statement. "We expect our financial profile to be enhanced significantly through reduced earnings volatility, improved profitability and stronger cash flow generation," said O'Brien.

Shares of Hercules rose nearly 27 per cent in pre-market trading to $21.15. Shares of Ashland were unchanged at $47.41. This year, Ashland stock has changed little in value, resulting in a market capitalization of $2.98 billion. Contrastingly, Hercules shares have declined 14 per cent in 2008, valuing the company at $1.88 billion.

Hercules would be required to pay Ashland a break-up fee of $77.5 million if it terminates the agreement to accept a superior offer. Ashland would be required to pay Hercules a fee in the same amount if the transaction is not completed due to a failure to obtain financing.

Citigroup advised Ashland, while Credit Suisse advised Hercules.