ECL Ecolab Inc

In a major move, leading cleaning and sanitation products company Ecolab Inc (ECL) has agreed to acquire Illinois-based water treatment company Nalco Holding Company (NLC) in a cash and stock deal worth roughly $8 billion. The deal, which is expected to close in the fourth quarter, has been approved by the Boards of both companies.

Shares of Nalco rocketed $7 (or 24.3%) to close at $35.87 on July 20 while the Minnesota-based Ecolab’s shares slid $4.08 (7.4%) to $51.31 as investors appear to perceive it to be an expensive buy.  

The Deal

Under the deal terms, shareholders of Nalco may opt to receive either 0.7005 share of Ecolab common stock or $38.80 in cash for each Nalco share, representing a 34% premium over Nalco’s closing price of $28.87 on July 19. The mix of overall consideration is 70% stock and 30% cash. 

Ecolab will issue roughly 68.9 million shares and will make a cash payment of roughly $1.6 billion to Nalco stockholders, representing an offer value of $5.4 billion. Moreover, Ecolab will assume $2.7 billion in Nalco debt, taking the total deal value to about $8.1 billion.

The completion of the transaction is contingent upon regulatory clearance, approval of shareholders of both the companies and customary closing conditions. Following the deal closure, Nalco will merge with a subsidiary of Ecolab. Bank of America (BAC) and Goldman Sachs (GS) acted as the financial advisors to Ecolab and Nalco, respectively, on the deal.

A Clear Leader

Headquartered in Naperville, Nalco, with annual sales of $4 billion, is the global leader in water treatment services with operations stretching across more than 150 nations. It offers water management sustainability services and focuses on industrial water, energy and air applications.

The company’s value-added services enable its customers to minimize energy, water and other natural resource consumption, reduce environmental releases while improving productivity. Nalco’s oil dispersants (the Corexit 9500) were used to clean up the Deepwater Horizon oil spill (also known as “BP oil spill”) in the Gulf of Mexico in 2010.

The deal is a strategic fit and highly complementary for Ecolab as it will enable it to bolster its water management business. It marks the union of Nalco's market leadership in water and energy services with Ecolab's competency in food safety and cleaning.

The merger will enable the combined entity to address major trends such as growing food demand and food safety, water scarcity, rising energy demand and aging population’s need for healthcare. The integrated company will have roughly $1.5 billion in sales from fast growing emerging markets and will have global leadership positions in key end-markets.

Financial Impact

The deal is expected to be accretive to the merged entity’s earnings in 2012 and beyond. There is also an opportunity for attractive synergies with Ecolab expecting combined annual cost synergies of $150 million. Moreover, the combined entity will have a strong balance sheet and cash flows which will allow it to invest in key growth areas and pare debt.    

Separately, Ecolab has lifted its adjusted earnings target for fiscal 2011 to $2.52-$2.56 per share (excluding the Nalco deal impact) from its earlier projection of $2.49-$2.53. Moreover, the company expects adjusted earnings of 64 cents a share for the second quarter, which is at the top end of its projected range of 62-64 cents. The company is expected to unveil its second quarter results on July 27.

Neutral on Ecolab

Ecolab provides products and services for the hospitality, foodservice, institutional and industrial markets. It leads in cleaning, sanitizing, pest elimination and food safety solutions with revenues of $6 billion.

Ecolab believes in growth through acquisition. The company made back-to-back acquisitions in 2010. Ecolab, in September 2010, acquired the commercial laundry business of Illinois-based privately-held Dober Chemical, which has boosted its North American commercial laundry operation. Moreover, Ecolab closed its acquisition of Australian cleaning and hygiene products maker Cleantec in December 2010, which expanded its Asia-Pacific reach.

More recently, in March 2011, Ecolab wrapped up the purchase of Virginia-based privately-held O.R. Solutions for roughly $260 million. The acquisition enables the company to broaden its U.S. health care business and strengthens its infection prevention solutions.

We are encouraged by Ecolab’s strong international exposure and recovery across its end-markets. However, the company faces stiff competition from Clorox (CLX) and Church & Dwight (CHD). Moreover, raw material price fluctuations represent a headwind for Ecolab. While multiple acquisitions have expanded Ecolab’s product range, such a strategy has inherent integration risks.

Currently, we have a long-term Neutral recommendation on Ecolab. The stock currently retains a Zacks #2 Rank, which translates into a short-term Buy recommendation.

 
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