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Shale price

7 October 2013 By Quentin Webb

Solvay is paying up to tap into fracking. The $13 billion Belgian chemicals group is staking $1.3 billion on Chemlogics, a U.S. specialist in compounds for extracting oil and gas. The price looks high. But there should be tax savings, a sales boost, and a chance to ride the shale revolution.

The all-cash deal values the private company at 10.7 times trailing EBITDA. That is far higher than Solvay’s own 6.3 times multiple, Starmine shows. It also trumps the mean 8.7 times multiple for chemicals deals from 1990-2012, as calculated by Valence Group, a boutique M&A house.

One Equity Partners, the JPMorgan-backed buyout shop, bought 37 percent of Chemlogics in 2011, and has presumably made a good return. Same goes for the company’s founders, who will remain involved.

For the buyer there are compensations. Solvay says tax savings cut the price to 8.7 times EBITDA. Meanwhile, Chemlogics customers are mostly smaller U.S. companies – so cross-selling products to Solvay’s bigger and more international client base could boost sales. Credit Suisse estimates this could be worth $30 to $40 million annually. Still, Barclays says the deal’s cashflow return on investment by 2016 will scarcely beat Solvay’s cost of capital.

The strategic case is stronger. The acquisition helps Solvay distance itself from competitive, low-margin commodity chemicals. Fracking, too, is a growth industry and where the United States has led, others will follow. This depends on horizontal drilling which is far more chemical-hungry than boring holes straight into the ground. Making chemicals that coax oil out sideways is the Californian firm’s forte.

The takeover also fits into a bigger reinvention at Solvay, following the 2009 divestment of its drugs unit, and the big takeover in 2011 of France’s Rhodia. Thus far, the transformation has proceeded only slowly, and the payback to investors has lagged rivals. It has delivered total shareholder returns of 65 percent since the Rhodia deal was announced, while the Euro Stoxx chemicals index has returned 97 percent.

Chief Executive Jean-Pierre Clamadieu’s goal of generating 3 billion euros in EBITDA by 2016 remains challenging. But finding a new seam of revenue in fracking nudges Solvay a little further in the right direction.


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