By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics

Chemtura

Chemtura AgroSolutions transaction

On April 17th, 2014, Chemtura Corp (NYSE:CHMT) announced that it has entered into a definitive agreement to sell its agrochemicals business, Chemtura AgroSolutions, to Platform Specialty Products Corp (NYSE:PAH) (OTCMKTS:PLAHF) (LON:PAH, a global specialty chemicals company, for approximately $1 billion. The consideration will be funded with $950 million in cash and 2 million shares of Platform’s common stock. The transaction is subject to customary purchase price adjustments, closing conditions and regulatory approvals and is expected to close in the second half of 2014. According to company, the divestiture unlocks significant value for shareholders and sharpens Chemtura’s focus as “pure-play” leader in industrial specialty chemicals.

Company profile

Chemtura Corp (NYSE:CHMT) is a global manufacturer and marketer of specialty chemicals. Upon completion of the transaction, Chemtura’s core platform will be focused around two segments: Industrial Performance Products (Petroleum Additives and Urethanes) and Industrial Engineered Products (Flame Retardants and Brominated Products, and Organometallics). According to Craig A. Rogerson, Chairman, President and CEO of Chemtura, the sale of AgroSolutions division accelerates company’s ability to deliver significant value to shareholders and furthers Chemtura’s transformation into a focused, pure-play industrial specialty chemical company.

Expected return of capital to shareholders

After completion of the transaction, Chemtura Corp (NYSE:CHMT) will have a much stronger balance sheet. Company plans to use the proceeds to reduce debt and return cash to shareholders. Chemtura actively repurchases shares: during fiscal 2013 company repurchased $54 million worth of shares, and during current fiscal 2014 year repurchased additional $97 million worth of shares. As of May 8th, 2014 company has outstanding authorization for additional stock buybacks in the amount $198 million. Depending on market conditions, if the desired amount to be returned to shareholders will be large, Chemtura might initiate a tender offer or declare a special dividend

Valuation summary

Based on a recent share price, Chemtura Corp (NYSE:CHMT)  had maket capitalization of $2.4 billion. Net debt stood at about $434 millionand enterprise value is $2.8 billion. Adjusting for $1 billion in proceeds from Chemtura Agrosolutions transaction (before taxes), enterprise value equals $1.8 billion. According to company statement, in calendar 2013, on a pro-forma basis, including the elimination of any stranded costs associated with recent portfolio divestitures, remaining businesses generated approximately $1.8 billion in net sales and $200 million of Adjusted EBITDA. These numbers imply an EV/EBITDA ratio of x9.1 (based on adjusted EV). An outright investment might be too risky for a conservative investor as the company emerged from bankruptsy only few years ago. At the same time, should the share price decline 20% percent or more, the risk/reward profile will be more attractive. Recent transaction, once completed, should provide a strong support for the stock price in the medium-term.