Ashland to buy specialty chem maker ISP for $3.2 bln

By Ernest Scheyder and Krishna Das

NEW YORK/BANGALORE (Reuters) – Specialty chemicals maker Ashland Inc has struck a deal to buy privately held International Specialty Products Inc for $3.2 billion as part of a plan to bolster its already-strong roster of products for the skin care, drug and energy sectors.

Shares of Ashland, best-known for its Valvoline oil brand, rose 13 percent in early trading.

Ashland, along with larger rivals Dow Chemical and BASF , have long focused on the specialty chemical sector, which offers high margins and tends to be resilient during recessions. Ashland also makes chemicals and materials for the packaging and water purification industries.

In buying New Jersey-based ISP, Ashland is betting that consumer demand for pharmaceuticals, skin creams, hair gels and cosmetics will only continue to grow.

The deal is a major windfall for the family of Samuel Heyman, a hedge fund manager who spun off International Special Products from roofing manufacturer GAF Materials Corp in the 1990s. Heyman died in 2009.

Once the deal closes in September, Ashland expects the deal to increase annual earnings by 50 percent to $1.1 billion before interest, taxes and depreciation and amortization. It said it expects margins to increase by 2.2 percentage points to 14.5 percent once the deal closes by September.

“This defining transaction enables us to significantly expand our market positions in higher-margin, higher-growth and less-cyclical global markets like personal care and pharmaceuticals,” Ashland Chief Executive James O’Brien said in a statement.

International Specialty brought in revenue of $1.6 billion and $360 million in EBITDA for its fiscal year ended March 31.

Nearly half of the revenue came from outside North America. That’s in line with the rest of the chemical industry, which has seen much of its growth outside the slow-recovering continent.

The buyout could eventually boost Ashland’s earnings per share by 43 cents, Jefferies & Co analyst Laurence Alexander said. Analysts expect fiscal 2011 earnings of $3.74 per share, according to Thomson Reuters I/B/E/S.

Ashland agreed to pay a $413 million break-up fee if the deal collapses.

The deal’s announcement marks a major return to duty for Ashland CEO O’Brien, who took several months off to recover from colon surgery.

Ashland hopes to save about $50 million annually by the second year after the deal closes.

The deal will be funded through cash and financing from Citigroup, the Bank of Nova Scotia, Bank of America Merrill Lynch and US Bancorp.

BofA Merrill Lynch acted as financial adviser to Ashland. Moelis & Co advised International Specialty.

Covington, Kentucky-based Ashland bought rival specialty chemicals maker Hercules in 2008 for $2.5 billion cash.

Ashland shares were trading at $69.15 shortly after the opening. The stock has risen 63 percent in the past 52 weeks. (Reporting by Ernest Scheyder in New York and Krishna N Das in Bangalore; Editing by Maju Samuel, Saumyadeb Chakrabarty, Dave Zimmerman)