Clariant divests Textile Chemicals, Paper Specialties and Emulsions businesses to SK Capital

MUTTENZ, DECEMBER 27, 2012 CLARIANT, A WORLD LEADER IN SPECIALTY CHEMICALS, HAS SIGNED AN AGREEMENT TO DIVEST ITS TEXTILE CHEMICALS, PAPER SPECIALTIES AND EMULSIONS BUSINESSES TO SK CAPITAL. THE TOTAL CONSIDERATION OF THE SALE AMOUNTS TO APPROXIMATELY CHF 502 MILLION, OUT OF WHICH APPROXIMATELY 460 MILLION IN CASH, EQUIVALENT TO 6.3 TIMES THE ESTIMATED FULL YEAR 2012 RECURRING EBITDA OF THOSE BUSINESSES. THE DIVESTMENT HAS BEEN APPROVED BY THE BOARDS OF BOTH COMPANIES. SUBJECT TO REGULATORY APPROVALS, THE TRANSACTION IS EXPECTED TO CLOSE BY THE END OF THE SECOND QUARTER OF 2013. For Clariant the transaction marks a significant milestone in the execution of its profitable growth strategy, after the acquisition of Sd-Chemie in 2011, CEO Hariolf Kottmann said. I am pleased that we are able to execute this divestment faster than originally expected. By the end of 2013, Clariant will be an even more profitable company than today, generating a majority of sales in noncyclical growth businesses. Barry Siadat, a Managing Director of SK Capital, noted, We are delighted to partner with the management and employees of these businesses to build upon their strong technology, brand, and leading market positions to more efficiently serve their large and growing global markets and customers. We believe these businesses provide an attractive platform to capitalize on their overlaps in technology, manufacturing, supply chain and logistics. Repositioning the companys portfolio is an essential part of Clariants profitable growth strategy. To achieve the targets set for 2015, Clariant will focus on markets with future perspectives and strong growth rates and on businesses that have a competitive position, resulting in strong pricing power. In this context, the company has announced in early 2012 to look for strategic options for the Business Units Textile Chemicals, Paper Specialties and the Business Line Emulsions until year-end 2013. Also subject to this process but in a second phase are the Business Unit Leather Services and the Business Line Detergents & Intermediates. In 2012, the divested businesses will generate an estimated CHF 1.2 billion in sales, equaling approximately 15 % of total Group sales, and an estimated EBITDA of CHF 80 million. The three businesses employ around 3,000 employees (14% of total workforce) in 35 countries around the globe. SK Capital is a private investment firm with a disciplined focus on the specialty materials, chemicals and healthcare sectors, located in New York, NY (USA) and Boca Raton, FL (USA). The company has a strong track record in chemicals investing, in transitioning non-core divisions of larger corporations to standalone entities and in acquiring global businesses.

Ok so this stock was covered by vishal in stock talk no.7 around May 30.Well as per all the calculations the fair price where,Clariant Chemicals would turn out to be a

good buy would have been around 520-545 and +55 for Cash in books would turn around at 575-600 as the comfortable buy price. Well that was May 2012 and now it is Feb 2013 and lot of water has flown down, after trading around 640 to 680 for major part of year 2012, its closed the day on 542 on BSE on 14-Feb-13, the day that I have initiated to write a further carry on report on the research of vishal and to find out whether its a screaming buy.

Well one reason for the stock to correct, can be from the above mentioned details which tell the parent company has decided to divest its Textile Chemical, Paper Specialties and Emulsions Business to SK Capital for a Approximate consideration of CHF 502 Million (Roughly 2962 Crores, 1 CHF=Rs.59, taken for Calculation) out of that around 460 Million would be in cash (Approximately 2714 Crores). Wow that is pretty good, that means I am going to get a hefty dividend, if I buy right now, I may be also offered a buy back,ok so let me buy this stock it has already crashed to 542.Wait,Wait,Waitdo not let any bias creep into your mind. The Day the deal was announced on 27-Dec-12, the stock went up by 5 % to 649 and the volume of stock traded on BSE increased by 8 to 10 times. This is what happens, whenever any deal is announced, suddenly there is frenzy in the stock as if the Aladdin had just rubbed his Lamp, and the Genie is going to shower some money for buying the stock. People just do not go into details of the transaction. From that price of Rs.649 the stock has tumbled in 16% absolute terms and the volume is back to normal. So what type of rationality has kicked in, lets check out with some figures of Speech..Oops Just Figures 1) The Parent Company Clariant has a debt of 1835 million CHF (10800 Crores) in form of Convertible Bonds, Straight Bonds, Certificate of Indebtness, Debt from Banks and other Financial Institutions Ok, so Clariant might be thinking to retire some debts from the cash it receives, but what about India where we are concerned? As per the Annual Report for FY11 for India, the Revenue was 956 Crore and Dyes and Specialty Chemicals consisted of 577 crore (That is 60 % of the Revenue) with an EBIT of 86 Crore out of 149 Crore (That is 58 % of the EBIT).The Said Divested business is Part of the Dyes and Specialty Chemicals 2) When the Deal was announced at that time Clariant India was trading at 630/Share, that means with 2, 66, 60,745 shares outstanding it was commanding a Market Capitalization Approx 1700 Crores. That means it was having a Market Cap of 1.7 times the sales for financial year 2011 and EV/Sales and EV/EBITDA of 1.5 and 8.5 respectively. 3) On 27/12/2012 The Global Parent Clariant was trading at 12.20 CHF on the SIX Exchange of Switzerland and so with 29,57,52,254 shares outstanding it was commanding a Market Cap of 360,81,77,498 CHF(21288 Crores Rupees) Approx. and with sales of 44000 crore and EBITDA of 4700 Crore in Indian rupees it was trading at 0.5 Times of Sales and was having a EV/SALES and EV/EBITDA of 0.7 and 6.8 times respectively. That means the Indian business is commanding a premium and the global parent is trading at a discount to Indian business. There can be a reason for that, India is a growing economy and the EBITDA margin is around 17.5 % compared to its Global margin of around 10 %.

But this cash is needed by the global parent to retire some of the debts from its books, but it needs to give something to Indian counterpart also for the divested business, but it would not like to part with major part of the cash and offer a good one time special dividend, though 63% will come back to them but they will have to pay DDT, Time factor, Forex Issues and time will only tell what Indian Shareholders will get. Here Iam wary of the Company because after nearly two months, they have still now not come out with any calculations that they have done for the Indian Part of the Divested Business. First Corporate Governance issue that I might have raised for Clariant (Out of the companies that I have researched, I can count on fingers, the companies that have good corporate governanceMy bad Luck).

My Prognosis Ok so let me take the most negative Path that will help me dealing with lot of biases that would creep in due to the time that I have spent on this scrip. Lets Forget the Sales Value and deduct the divested Business out of the Group. So with sales of 956-230(40% of Dyes and Specialty Segment of 577 Crores)=726 Crores so if I give a Market Cap of 1.7 times the sales, then it would come to around 462/Share. Let me assume that another 150 Crore come in the Way of Dividends, that would be around 56/Share and so that would give me a price of 518/Share. Ok so the share price has corrected till now as I complete my half baked research (No Concrete Data of actual sales of Indian Business still now not available)so some figures have been assumptive. As on Date 18-Feb-2013 the stock has hit a 52 week low on BSE at Rs.537/Share, So somewhere down the line, My research feels Vindicated. Any Buying, if at all I would Initiate would be below 490/ShareTill then its time to sleep.

Thanks and Regards Happy Investing Reni George