Ashland, which makes chemicals and Valvoline motor oil, said on Friday that it would acquire Hercules in a $2.6 billion cash-and-stock deal that would significantly boost its product offerings.
The acquisition would give Ashland a major presence in the water treatment arena that primarily services the pulp and paper industry. It would also increase the company's portfolio of specialty additives and ingredients.
Under the deal, Ashland would pay $18.60 in cash and 0.093 of a share for each Hercules common share.
Based on closing stock prices on Thursday, the transaction values Hercules at $2.6 billion, or $23.01 a share, a 38 percent premium. Including net assumed debt, the deal is worth $3.3 billion.
The news pushed shares in Ashland shares down nearly 16 percent to $39.99 on the New York Stock Exchange, while Hercules climbed more than 24 percent to $20.68.
Despite the drop in Ashland shares, Jefferies & Co analyst Laurence Alexander praised the link-up of the two companies. "We view the deal as incrementally positive insofar as the acquisition does not entail significant restructuring requirements at Hercules," Alexander said in a note to investors.
The deal comes a day after Dow Chemical said it would acquire specialty chemical maker Rohm and Haas for $15.3 billion in an all-cash transaction.
The latest deal would create three businesses -- specialty additives and ingredients, paper and water technologies, and specialty resins, Ashland Chief Executive James O'Brien said in a statement.
"We expect our financial profile to be enhanced significantly through reduced earnings volatility, improved profitability and stronger cash flow generation," O'Brien said.
The companies forecast annual cost savings of $50 million by the third year following the merger's close, which they expect to occur by the end of 2008.
In the first year of combined operations, the deal would be modestly dilutive to earnings per share on a reported basis.
However, excluding one-time items, it is expected to significantly boost Ashland's earnings per share.
Hercules must pay Ashland a break-up fee of $77.5 million if it terminates the agreement to accept a superior offer. Ashland would have to pay Hercules the same amount if it fails to obtain financing to complete the transaction. Advisers in the deal were Citigroup for Ashland and Credit Suisse for Hercules.
Ashland will fund the deal through a combination of cash on hand and committed debt financing from Bank of America and Scotia Capital.
The company plans to use cash flows of the combined entity to pay down debt, with a goal of attaining investment-grade credit ratings within two to four years after closing the transaction.