More Upside Potential for This Company on a Potential Buyout

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Barry Rosenstein, through his $5 billion activist hedge fund Jana Partners, accumulated up to 2.77 million shares of Rockwood Holdings (NYSE: ROC), accounting for around 3.5% stake in the company at the end of 2012. Jana Partners commented that Rockwood Holdings should be worth around $80 per share, a 24% premium to its current trading price of around $64.40 per share.

Since the beginning of the year, Rockwood has experienced a sweet gain of more than 30%, from around $49 per share to nearly $65 per share. Is Rockwood a good buy at its current price? Let’s find out.

Diverse customer base with European concentration

Rockwood is a global leader in developing, manufacturing, and providing lithium and surface treatment chemicals, advanced ceramic titanium dioxide pigments, and clay-based additives to different end-use markets including chemicals and plastics, metal treatment, specialty coatings, and the construction industry.

The company reported that no single end-use market represented more than 17% of its total 2012 sales. Rockwood is operating in five business segments: Lithium, Surface Treatment, Performance Additives, Titanium Dioxide Pigments, and Advanced Ceramics.

Most of its revenue, $890 million, or 25% of total 2012 revenue, was generated from the Titanium Dioxide Pigments segment. The Surface Treatment and the Performance Additives segment both ranked second with similar revenue of $720 - $730 million, with each accounting for 21% of the total revenue.

Rockwood has quite a diverse customer base with more than 60,000 customers around the world. Rockwood is a big player in Europe, with 54% of its sales coming from the continent, while North America accounted for only 24% of total sales.

At around $64.40 per share, Rockwood is worth around $5.1 billion on the market. The market values the company at 8.44 times EV/EBITDA. According to Jana Partners, Rockwood’s two segments: lithium and surface treatments might be a potential takeover target for large multinational chemical corporations including BASF (NASDAQOTH: BASFY.PK), Albermale, and Sociedad Quimica y Minera (NYSE: SQM).

BASF - one of the largest global chemical companies

BASF is among the biggest global chemical companies with around 113,000 employees, operating in six segments: Chemicals, Plastics, Performance Products, Functional Solutions, Agricultural Solutions, and Oil & Gas.

Most of its operating income, €4.1 ($5.35) billion, was generated from the Oil & Gas segment, while the Chemicals segment contributed €1.72 ($2.24) billion in operating income. BASF is a much larger company with around $79 billion in total market cap. Furthermore, BASF has a quite strong balance sheet with low leverage. As of December 2012, it had $1.8 billion in cash and no debt.

In March 2013, BASF announced its partnership with Owens Corning and TenCate Advanced Composites for better, lighter, and more environmentally friendly products for automotive mass production. BASF will contribute significantly to the alliance through its leading knowledge in the formulation and production of thermoplastic reins.

The Chilean chemical company is also the potential acquirer

Sociedad Quimica is also a bigger company than Rockwood, with more than $13.1 billion in total market cap. Headquartered in Chile, Sociedad Quimica is the producer of specialty plant nutrients and chemical commodities, operating in six business segments: Specialty Plant Nutrition, Iodine and Derivatives, Lithium and Derivatives, Industrial Chemicals, Potassium, and Other Products and Services.

The company has a strong balance sheet. As of September 2012, it had $2.32 billion in total stockholders’ equity, $880 million in cash and short-term investments, and around $1.6 billion in both long and short-term debt. In the beginning of April, Sociedad Quimica raised more low-cost debt of around $300 million in 10-year unsecured bonds on the international market to refinance its long-term debt and finance its operations. The bond will bear a 3.625% interest rate.

Interestingly, BASF has the cheapest valuation among the three. At $86.70 per share, BASF is valued at nearly 5.7 times EV/EBITDA. Rockwood’s ranked second with 8.44 times EV/EBITDA. Sociedad Quimica is trading around $50 per share, with a total market cap of around $13.1 billion. It has the most expensive valuation of the trio, with around 13 times EV/EBITDA.

All three companies are paying decent dividends. Sociedad offers the highest dividend yield at 3.2% while BASF’s dividend yield stays lower at around 2.8%. Rockwood also pays shareholders a good dividend with a yield of 2.5%.

My Foolish take

Previous, Seifi Ghasemi, Rockwood’s chairman and CEO, announced in February that the company hired Lazard to explore the sale of three out of its five units. As Lithium and Surface Treatment generated around $182 million and $155.2 million, respectively, in EBITDA, a 9 times EV/EBITDA buyout might value those two business segments at more than $3 billion, or 60% of its total market cap. Indeed, investors might consider Rockwood as an opportunistic stock on the potential sale of its business segments.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Sociedad Quimica y Minera (ADR). The Motley Fool owns shares of Rockwood Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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