Bangalore/New York: US cleaning products giant Ecolab Inc offered to buy water treatment services company Nalco Holding Co for $5.4 billion, as it looks to bolster its presence in the lucrative market to treat residual water from drilling for oil.
Increasing pressure on shale gas drillers to clean up their act from hydraulic fracturing, or “fracking”, has opened up a new revenue stream for companies like Nalco and Clean Harbors in the waste water clean-up market.
“We really like the customer base that Nalco serves. Oil and gas extraction process increasingly is going to be very water dependent, as you’ve got to go deeper to find it,” Ecolab’s chief executive Douglas Baker told Reuters.
The oil spill in the Gulf of Mexico last year, the recent floods in Mississippi and the oil spill from the ruptured pipeline in Montana on Yellowstone River have led to a rise in demand for water treatment services.
The deal will combine Nalco’s strength in chemicals that reduce resource consumption and minimize environmental releases, with Ecolab’s strength in the sanitizing and infection-control services to the food and beverage, healthcare and institutional markets.
Naperville, Illinois-based Nalco had sales of about $4.25 billion in 2010 and operates in more than 150 countries.
CEO Baker said the combined company would record about $11 billion in sales and grow by about $1 billion a year.
The combined company would earn about $3 per share on an adjusted basis in 2012, Ecolab said in a statement.
St. Paul, Minnesota-based Ecolab said the transaction, which is expected to close in the fourth quarter, is expected to add to earnings in 2012 and subsequent years.
Ecolab shares fell 4% to $53.30 in trading before the bell.
Cash and Stock Deal
Nalco shareholders could elect to get 0.7005 Ecolab’s share for each share held, or $38.80 per share in cash - a 34% premium to Nalco’s Tuesday closing on the New York Stock Exchange.
The overall mix of consideration paid to Nalco shareholders will be about 30% cash and 70% stock. Ecolab will issue about 68.9 million shares and pay about $1.6 billion in cash.
Including the assumption of $2.7 billion of Nalco’s debt, the transaction is valued at about $8.1 billion.
The deal values Nalco at 10.9 times 2011 earnings before interest, taxes, depreciation, and amortization (ebitda), before synergies.
Taking the expected cost savings of about $150 million into account, Ecolab is paying 9 times ebitda, compared with where Ecolab is trading today - 11.9 times.
Ecolab has raised its full year 2011 adjusted earnings per share forecast to $2.52-$2.56 from $2.49-$2.53, while Nalco also raised its full-year adjusted earnings outlook to $1.65- $1.70 per share.
If Nalco terminates the deal, it will have to pay $135 million, and if Ecolab ends the deal, it will have to pay Nalco $275 million.
Bank of America Merrill Lynch acted as financial adviser to Ecolab, while Goldman Sachs was financial adviser to Nalco.