By Anthony Borgese, Zen Suzuki, Jessica Pei, Susan Xiao (University of Pennsylvania), Christina Lee, Ryan Horlick, and Britney Cheng (University of Michigan)
Overview of the deal
Acquirer: Lanxess AG (OTCMKTS: LNXSF)
Target: Emerald Kalama Chemical
Total Transaction Size: $1.04 Billion
Announce Date: Feb 14th, 2021
Expected Close date: Second Half of 2021
Legal Advisor to Acquirer: Shearman & Sterling
Lanxess AG has agreed to purchase 100% of Emerald Kalama Chemical’s shares from majority owner and private equity firm American Securities LLC, for a purchase price of 867 million euros ($1.04 billion). The price tag comes from Emerald Kalama’s enterprise value of $1.075 billion, minus about $35 million in debt-like items. Lanxess will finance the transaction with their existing liquidity. Lanxess believes that Emerald Kalama’s products will perfectly complement their Consumer Protection portfolio, and forecasts top line and cost based synergies of 25 million euros ($30 million) by 2024. With their acquisition of a global leader in the consumer segment of specialty chemicals, the Germany-based company hopes to strengthen their position in areas like the food and animal health industries – these sectors in particular have potential for long-term growth due to the global rise in pests as well as increasing demand for plastic-free packaged and processed foods. In addition, Lanxess has its North American headquarters in Pittsburgh and hopes to strengthen their presence in the North American market, where Emerald Kalama currently generates about 45% of their $425 million in sales. Lanxess anticipates that they will be able to quickly integrate Emerald Kalama’s production activities, which are already efficiently bundled into three sites.
Company Details: (Acquirer - Lanxess)
Lanxess is a German specialty chemicals company that produces and develops chemical intermediates, additives, and plastics. Lanxess places emphasis on performance and customers’ requirements when developing new products and solutions. Lanxess also values following environmental and safety standards to establish sustainable solutions. (Source: Lanxess.com)
Founded in 2004, headquartered in Cologne, Germany
CEO: Matthias Zachert
Number of employees: 14,000
Market Cap: $5.4B (as of 2/21/2021)
EV: $6.4B (as of 2/21/2021)
LTM Revenue: $6.2B
LTM EBITDA: $872M
LTM EV/Revenue: $1.1B
LTM EV/EBITDA: $3.9B
Company Details: (Target - Emerald Kalama)
Emerald Kalama is a privately owned specialty chemicals company. The company offers material solutions in the adhesives, foods, beverages, fragrances, cosmetics, home care, rubber, and vinyl product areas. Emerald Kalama also prides itself on being a leader in fragrance chemical compounds. Additionally, all of the company’s ingredients are produced within their operations in the U.S. and Europe. (Source: EmeraldKalama.com)
Founded in 2008, headquartered in Washington, USA
CEO: Edward T. Gotch
Number of employees: 500
EV: $1.075B (as of 2/15/2021)
Projections and Assumptions
After the announcement of the deal on February 14th by Lanxess, the price per share of their stock reached its second highest in the past year on the 16th, signifying that this is a favourable transaction by investors.
With high growth potential, the businesses of Emerald Kalama Chemical are an ideal fit for Lanxess. Emerald Kalama generates 75% of its turnover with specialties in the consumer segment. The transaction brings opportunities to further strengthen Lanxess’s Consumer Protection segment and open up new application areas with strong margins such as the food industry and animal health sector. In addition, Lanxess also expects to enlarge their presence in the growth region of North America, where Emerald Kalama generated about 45% of their sales last year. This transaction brings tremendous areas of growth and potential, all of which can help Lanxess become more profitable and stable in the near future.
Because Emerald Kalama has a very efficient setup as it has bundled all of its production setup into three sites, Lanxess anticipates a short adjustment period and quick integration of their new business.
In 2020, Emerald Kalama reported sales of around $425 million with earnings before interest, taxes, depreciation, and amortization (EBITDA) of approximately $90 million. It is expected that within three years following the completion of the transaction, Emerald Kalama will be able to generate an additional $30 million in EBITDA from synergies and cost savings. Lanxess said the acquisition would be generating earnings-per-share accretive within the first fiscal year after the completion of the transaction.
Laxness has been opting for a more holistic, gradual approach to expanding into the customer segment of speciality chemicals. After talks about acquiring Lonza Group AG’s Speciality Ingredients business, Laxness passed on the $4.6 billion dollar deal in hopes to add to its antibacterial solutions without overpaying. The deal with Emerald Kalama Chemical satisfies this criteria, as it was one that was deemed at a “reasonable” price, but would still make Laxness more profitable and stable in the long run. The transaction would further strengthen Lanxess’ Customer Protection segment and open up new application areas with strong margins such as the food industry, enlarging their presence in the growth region of North America. Within the years following the transaction, Laxness would expect an additional annual EBITDA contribution of around 30 million USD from effects of synergy. Moreover, the combined entity will become a significant player in antimicrobial active ingredients and preservatives, an increasingly competitive market, and be better positioned to open up to and take a target approach on new, strong margin areas such as consumer protection products and animal hygiene.
Overall, the acquisition provides a launch pad for Lanxess to pursue a target expansion of its portfolio in the Consumer Protection segment. The combined company would accelerate its growth course in and could create strong offerings for speciality chemicals, especially for the customer segment.
Risks and Uncertainties
As a reasonably priced targeted expansion, the acquisition of Emerald Kalama fulfills a specific strategic goal for Lanxess. The target company has a strong presence in areas where Lanxess is looking to expand. Specifically, Emerald Kalama has a strong consumer protection segment, which has been very profitable since the coronavirus pandemic. Additionally, Emerald Kalama is involved in the food industry and animal health sectors, which are known for having high margins and Lanxess has yet to expand into. A risk associated with entering these new sectors is the potential for unsuccessful integration for the pro forma company. Lanxess is seeking to expand into three historically unfamiliar sectors through this acquisition. Although this method is much more efficient than organic expansion, the largest risk is failed transfer of knowledge. However, Lanxess has an existing presence in North America so the company will not have to overcome many cultural differences. Additionally, Emerald Kalama has only three production sites, which should allow for quick integration.
Currently, Emerald Kalama provides value as a target due to its portfolio of anti-bacterial solutions. The strength of this sector relies heavily on the existence of the coronavirus pandemic. A large uncertainty regarding this acquisition is the prospective length of the pandemic and the demand for anti-bacterial products post-pandemic. The deal still needs to be approved by regulators and vaccine distribution is already underway. The high demand for anti-bacterial production may not be as prevalent as projected by the time the acquisition is completed.