Filed
by Ashland Inc.
ASHLAND
ANNOUNCEMENT
July 11, 2008
CORPORATE PARTICIPANTS
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Eric
Boni |
Ashland
Inc. |
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Director
- IR |
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Jim
O'Brien |
Ashland
Inc. |
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Chairman, CEO |
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Lamar
Chambers |
Ashland
Inc. |
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SVP, CFO |
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Craig
Rogerson |
Hercules
Inc. |
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President,
CEO |
CONFERENCE CALL PARTICIPANTS
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Jeff
Zekauskas |
JPMorgan |
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Analyst |
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Laurence
Alexander |
Jefferies
& Co. |
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Analyst |
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Mike
Harrison |
First Analysis
Securities |
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Analyst |
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Rob
Felice |
Gabelli &
Corp. |
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Analyst |
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Christopher
Miller |
JPMorgan |
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Analyst |
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David
Begleiter |
Deutsche
Bank |
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Analyst |
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Andy
Baker |
Jefferies
& Co. |
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Analyst |
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John
McNulty |
Credit
Suisse |
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|
Analyst |
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| ▪ |
Steve
Velgot |
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Analyst |
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| ▪ |
David
Troyer |
Credit
Suisse |
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|
Analyst |
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| ▪ |
Bill
Hoffman |
UBS |
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Analyst |
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| ▪ |
Ali
Levine |
Shakeman
Capital |
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Analyst |
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| ▪ |
Brad
Logato |
Igens |
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|
Analyst |
PRESENTATION
Operator:
Good day ladies and gentlemen, and welcome to the Ashland Hercules Acquisition
Conference Call. My name is Solana. I will be your coordinator for today. At
this time, all participants are in a listen only mode. We will be facilitating a
question and answer session towards the end of this conference.
(OPERATOR
INSTRUCTIONS)
As a
reminder, this conference is being recorded for replay purposes. I would now
like to turn the presentation over to your host for today's call, Mr. Eric Boni,
Director of Investor Relations. You may proceed.
Eric
Boni: Thank you, Solana, and good -- good morning. Welcome to the conference
call to discuss our announcement this morning concerning Ashland's pending
acquisition of Hercules.
Before we
get started, I'd like to introduce the participants on our call -- Jim O'Brien,
Chairman and Chief Executive Officer of Ashland; Lamar Chambers, Ashland's
Senior Vice President and Chief Financial Officer; and Craig Rogerson, Hercules'
President and Chief Executive Officer.
Now,
let's turn to Slide Two. Before we get started, let me remind you that
statements made during the course of this presentation will be made that
constitute forward-looking statements as that term is defined in relevant
Securities laws. Such statements are subject to numerous risks, uncertainties
and assumptions, which are fully described in Ashland's and Hercules' joint
press release this morning and our filings with the SEC in connection with the
proposed transaction as well as our required quarterly and annual
filings.
As you
will hear in more detail later, the transaction we announced this morning is
subject to various conditions and approvals. While Ashland and Hercules believe
our expectations regarding the transaction are based on reasonable assumptions,
we cannot assure that those expectations will ultimately be achieved or that the
transaction will be completed. We encourage you to read the Form S-4 and any
other relevant documents that will be filed in the coming months with the SEC by
Ashland and Hercules.
Let's go
to Slide Three. During our call today, we'll open with an overview of the
Ashland/Hercules transaction. I'll discuss the terms then turn the proceedings
over to Jim O'Brien. Jim will discuss the strategic benefits to review the two
businesses. Lamar Chambers will then detail the financing, and Jim will conclude
with the expected synergies, integration plan and our time line to completion.
We'll then open the lines for your questions.
Now,
let's look at the terms of the transaction on Slide Four. This morning, we
announced that the Boards of Directors of Ashland and Hercules approved a
definitive merger agreement whereby Ashland will acquire all of the outstanding
shares of Hercules. The consideration consists of cash in the amount of $18.60
per Hercules share and 0.093 of a share of Ashland common stock for each share
of Hercules stock. The current implied price is $23.01 per share, based upon
Ashland's July 10 closing price.
This
represents a 38% premium to Hercules shareholders over the closing stock price
on July 10th and a 26% premium to the stock's 30-day average. The stock portion
is based on a fixed exchange ratio and is not subject to a collar. The total
transaction is valued at approximately $3.3 billion, including net assumed debt
of $0.7 billion. We expect to complete the acquisition by the end of calendar
2008. Please turn to Slide Five, and I'll turn the call over to Jim
O'Brien.
Jim
O'Brien: Thanks, Eric. Good morning, everyone. I'd like to welcome Craig
Rogerson, President and Chief Executive Officer of Hercules. We're glad he could
join us here today.
Craig
Rogerson: Thank you, Jim. We're enthusiastic about the opportunity for Hercules
to join with Ashland. Our companies share proud and similar histories of nearly
100 years of innovation, dedication and service. Hercules shareholders will
receive a significant premium for their shares and, through their ownership of
Ashland shares, to enjoy the opportunity to participate in the upside potential
of the combined company. We look forward to working with the Ashland team to
bring these two great companies together.
Jim
O'Brien: Thanks, Craig. We too are excited about the opportunity to combine
Hercules with Ashland. The acquisition of Hercules fulfills our objective to
create a major global specialty chemicals company. With these transactions,
specialty chemicals will drive our business both strategically and financially.
Estimated pro forma EBITDA doubles with approximately 75% generated by our
specialty chemical core. Combined, the Company generates more than $10 billion
in revenues.
We will
increase our presence in important growth markets like China, Eastern Europe,
and Brazil, boosting Ashland's revenue outside North America from $2.3 billion
to $3.5 billion in the combined company. When the transaction is complete, we
will achieve greater scale and significantly enhance our focus in three
specialty chemical businesses, specialty additive and ingredients, paper and
water technologies and specialty resins.
We will
also realize a leadership position in renewable and sustainable chemistries. We
believe that offering sustainable chemistry alternatives is important to our
customers. In addition, being able to diversify our raw materials can reduce the
cyclicality of our earnings.
With
Hercules' contribution, approximately one-third of Ashland's EBITDA will be
derived from renewable resources. Through this focused specialty chemicals core
Ashland should be able to deliver more stable and predictable earnings, generate
stronger cash flows and gain access to higher growth markets
worldwide.
Now, for
those who aren't familiar with Ashland or Hercules, I will provide a short
overview of the two businesses. Let's continue on Slide Six. Ashland was founded
in 1924 and has been publicly traded since 1936. We have also been a member of
the Fortune 500 since the list was created in 1955. Ashland has shed its
historical identity as a regional petroleum refiner and today is a global
chemical company with sales in more than 100 countries and nearly 12,000
employees.
Through
our Ashland Performance Materials division, we are a worldwide manufacturer of
unsaturated polyester and vinyl ester resins and gelcoats, metal casting
consumables and high-performance adhesives, supplying primarily the building and
construction, transportation, metal casting, packaging and converting and marine
industries. Ashland Water Technologies provides water treatment chemicals and
services to municipal, industrial, commercial and institutional facilities as
well as ocean-going vessels.
While our
acquisition of Hercules will expand our core and specialty chemicals, our
Ashland Distribution and Valvoline businesses are strong leaders in their own
markets and will remain complementary adjacencies to our defined core by adding
valued capabilities.
Ashland
Distribution is a leading distributor of chemicals, plastics, composite
materials and environmental services in North America and plastics in Europe.
Valvoline manufacturers and markets premium-branded motor oils, automotive
chemicals and appearance products, and our Valvoline Instant Oil Change unit is
the second largest quick lube chain in the United States.
For the
12 months ended March 31, 2008, Ashland's total revenue was $7.9 billion, and we
generated $365 million of EBITDA. Given that our focus today is on the Ashland
Hercules transaction, we have provided only a brief overview of our businesses.
If you are interested in additional details about our divisions, further
information is provided in the appendix to this presentation.
Now,
let's look at Hercules on Slide Seven. Hercules was formed in 1912 as a spin-off
from DuPont and has been a publicly traded company for more than 75 years. It
currently has operations on four continents, North America, Europe, Asia and
South America, generating trailing 12-month sales of $2.2 billion.
Hercules
is composed of two major groups, Paper Technologies & Ventures and Aqualon,
both of which are focused on materials for water-based systems and products.
Paper Technologies' principal products are specialty chemicals used by the paper
industry to increase paper and paperboard performance and enhance the
manufacturing process.
Aqualon's
specialty additives and ingredients are used across a wide range of industries
to make everything from paints and adhesives to foods, pharmaceuticals and
personal care products. These additives impart a specific quality to the product
such as helping to thicken or increase durability.
Both of
these groups are recognized as leading worldwide suppliers in their respective
markets. Now, I am pleased that their leaders, Paul Raymond, President of
Hercules Paper Technologies and Ventures group, and John Panichella, President
of Aqualon, will be joining Ashland to continue running these successful
businesses. Again, you will find more detail about the Hercules businesses in
the appendix to this presentation.
Let's
turn to Slide Eight now to see how this transaction will enhance Ashland's
specialty chemicals profile. The combination of Ashland and Hercules creates a
very significant specialty chemicals company and transforms Ashland's financial
profile. This transaction fulfills the goal we have been working toward for the
last several years.
While
today our specialty chemical businesses contribute 29% of revenue and 45% of
EBITDA, the combined entity generates 45% of revenue from the specialty core and
roughly 75% of EBITDA. Through this focused specialty chemicals core, Ashland
should be able to deliver more stable and predictable earnings, generate
stronger cash flows and gain access to higher growth markets
worldwide.
What will
our specialty chemicals core look like? Let's turn to Slide Nine. This picture
graphically depicts our key markets and how we will serve them through our
expanded specialty chemicals core. Looking at the outer ring, our combined
specialty chemical businesses will be focused on four large and global markets,
water treatment, building and construction, transportation and regulated markets
and their associated verticals.
With
Hercules, we achieve strong market positions and promising growth potential,
particularly from our organic space. In the market for water treatment
chemicals, the combination of Hercules' Paper Technologies & Ventures with
Ashland Water Technologies generates $2 billion in annual revenue.
We will
have strong leadership positions in the pulp and paper, municipal, industrial,
marine segments. Our focus within the global building and construction market
includes such key segments as additives for paints and coatings, thermoset
resins, adhesives and coatings for the commercial and residential construction
segment and thermosets and adhesives for the infrastructure in wind energy
segments. In the transportation market, we sell thermoset resins, gelcoats,
structural adhesives and metal casting consumables into the light vehicle,
marine and heavy truck segments.
Our
fourth target market, regulated markets, will be our fastest growing and
consists of specialty additives and ingredients for regulated businesses
including personal care, pharmaceuticals and food.
Moving
inward, our combined specialty chemical businesses will be able to leverage two
shared capabilities. The first is formulation. That is getting specialty
chemicals to impart specific functional benefits, the second, application skills
that use specialty chemicals to optimize customer processes. Finally, three
foundational chemistries that can be leveraged across multiple markets will be
the focus of our technology investments.
First is
water-soluble polymers. This will be an expanded focus for us in an area in
which we will enjoy Day One leadership through integration of the Aqualon
businesses. We will have producer positions in approximately half of the types
of water-soluble polymers available today and server three of our four key
markets.
Second,
thermostat resins, Ashland has a deep history and strong leadership position in
thermostat resins and serves two of our four key markets through this chemistry.
And third is specialty water chemicals. Ashland has a long involvement in this
chemistry, and it has been our focus for growth and expansion. With Hercules, we
can apply this chemistry across all key vertical segments of the water treatment
market.
For one
example of how our enhanced focus and expanded scale in specialty chemicals can
help our customers to succeed, let's move to Slide Ten. Our intent is to
integrate Ashland's Water Technology business with Hercules' Paper Technologies
& Ventures business creating one global $2 billion paper and water
technologies business of significant scale and capabilities.
And
industry of focus is pulp and paper, which is one of the largest consumers of
processed water. Efficiently managing water and water reuse is critical to the
success of paper mill operation and due to the increasing use of recycled water
and paper, the demand for specialty paper chemicals is expected to grow at a
faster pace than the industry overall.
The
product offerings and geographic footprints of the Ashland water and Hercules
paper businesses are complementary to one another. Hercules brings broad process
and functional capabilities as well as producer positions and key size and
strength additives. Ashland brings expertise in process in utility water
treatment as well as producer economics in drainage and retention
chemicals.
In
combination, our complementary business positions should enjoy well-established
channels to serve the global marketplace. The new paper and water organization
will enable a broad product offering that touches the major buying areas of the
paper mill and achieves a point of differentiation by superior execution through
the largest technical sales force in the industry. Lamar Chambers will now
review the financing of the transaction. Lamar?
Lamar
Chambers: Thank you, Jim. The consideration will be paid in cash and Ashland
stock. In addition to cash on hand, we secured $2.7 billion of committed
financing from Bank of America and Scotia Capital that consists of commercial
bank and institutional secured loans as well as senior notes.
We expect
$2.2 billion of the commitment to be drawn at closing. The remaining [$500
billion] of the commitment consists of revolving credit agreement that will be
used to provide liquidity. We will also use 10.5 million Ashland common shares
-- issue 10.5 million of Ashland common shares to Hercules shareholders at
closing to complete transaction funding.
When the
transaction closes, Ashland's debt to EBITDA ratio is expected to be in the
range of 3.2 to 3.3 times. We plan to use excess cash flow to reduce our
leverage to between 1.5 to 2 times EBITDA within two to four years. We believe
this is important to help us achieve our goal of earning an investment grade
credit rating. Let's now move to Slide 12, and Jim will continue.
Jim
O'Brien: When we look at the financial benefits of the transaction, we expect to
capture cost savings of $50 million by Year Three. This will be achieved by
eliminating redundancies in overhead, in realizing operational efficiencies in
our technology, procurement and logistics activities. This is in addition to the
$65 million in expense reductions within the current Ashland business that I
talked about on our most recent earnings call.
While it
is expected to be modestly dilutive to earnings per share on a reported basis,
the combination should be significantly accretive to our earnings per share in
the first full fiscal year post closing excluding merger costs and depreciation
and amortization charges resulting from the transaction.
In
addition, as you may know, Hercules has significant legacy liabilities. This is
an area we know well due to our management of similar liabilities at Ashland. We
conducted extensive due diligence on this transaction, and we carefully
considered these issues and costs. Based on our own track record, we are
confident that we have the ability and the expertise to manage
them.
Let's
take a look at our next steps on Slide 13. As you might expect, there are
various conditions that must be met in order for this transaction to close.
These include a special meeting of Hercules shareholders to seek approval of the
transaction and standard regulatory approvals such as Hart-Scott-Rodino.
Assuming all the conditions are satisfied, we expect to close by the end of
calendar 2008.
As we
consider how best to combine our businesses, we will bring together an
integration team pairing people from key functions from both businesses. Working
together, the team will identify how to most effectively leverage the strengths
of the combined entity and bring forward the best practices each business has to
offer to grow our business globally, drive efficiency and leverage our
technology investments. There is much to be done to combine the two companies,
and the integration team will establish goals, metrics and timelines to ensure
that we capture the synergies.
We are
excited about the opportunity to combine our companies and create a major global
specialty chemicals company with strong market positions and promising growth
potential. We will be able to align our strengths and the foundational
chemistries of water-soluble polymers, thermoset resins and specialty water
chemicals, both enhancing our focus and expanding our scale in global markets.
We will also become a leader in attractive and growing renewable and sustainable
chemistries.
When the
integration is complete, Ashland should be stronger, achieve margins more
reflective of a specialty chemicals business and deliver more consistent,
predictable earnings. With that, we'll open the line for questions.
QUESTIONS AND ANSWERS
Operator:
(OPERATOR INSTRUCTIONS)
The first
question comes from the line of Jeff Zekauskas from JPMorgan. You may
proceed.
Jeff
Zekauskas: Hi, good morning.
Jim
O'Brien: Good morning, Jeff.
Jeff
Zekauskas: A few questions, what's the present value of the asbestos
liabilities, Hercules, that you've assigned?
Jim
O'Brien: Lamar?
Jeff
Zekauskas: Or, all legacy liabilities?
Lamar
Chambers: We are not prepared at this time to disclose the valuation or
numerical assessment of that. I will say that, as part of the due diligence
process, Ashland along with Hercules personnel and including third parties
involved in the process have been very diligent in that area in making sure we
understand the issues. Of course as you know, Ashland has similar issues, and
it's in its own business in terms of the asbestos and environmental matters, and
we feel like this is an area we thoroughly understand and we're quite
comfortable with our assessments around that, but we're not prepared to quantify
it.
Jeff
Zekauskas: Second question is, in rough terms, if the pretax income of Hercules
is $200 million and you've got about, I don't know, $110 million or $120 million
in financing costs, you add 10 million extra shares, it looks like in rough
terms the transaction, excluding whatever amortization costs that you've talked
about, it looks like it's accretive by about $0.80. Is that right? Is that in
the ballpark?
Lamar
Chambers: I'm not going to be able to confirm your exact math on that.
Obviously, I have to assess that, but as we said in the -- or, as Jim said in
his comments, we do expect the transaction to be significantly accretive when
you exclude the DNA that results from the transaction accounting, the purchase
accounting on Hercules as well as the transaction costs, those up-front costs
associated with the merger.
Jeff
Zekauskas: The last question is that -- what do you really expect the return on
capital of the transaction to be two or three years out in that probably right
now, it's below your cost of capital. So -- and in the numbers that you've
outlined, you don't get to your cost of capital. So is -- so, what do you think
about that?
Lamar
Chambers: Well we believe overall, the -- obviously, the transaction will exceed
our cost of capital. We think that was a significant threshold in our evaluation
of the opportunity, and over time and based on the way we've evaluated the
business, we believe it will significantly exceed our cost [there].
Jeff
Zekauskas: And what's your cost of capital as you understand it?
Lamar
Chambers: We don't disclose that, but you can look at the public markets and
pretty well get it to a range there that I think would be close to
reasonable.
Jeff
Zekauskas: Okay. Thank you, very much.
Jim
O'Brien: Thanks, Jeff.
Operator:
And our next question comes from the line of Laurence Alexander from Jeffries.
You may proceed.
Laurence
Alexander: Hello.
Jim
O'Brien: Good morning.
Laurence
Alexander: I guess I want to follow up on Jeff's question maybe coming at it
from a slightly different angle. Can you walk through your logic and assessment
for doing this acquisition versus the accretion from a share buyback, I mean if
you can't address the cost of capital?
Jim
O'Brien: You know Laurence, when we sat down and did our evaluation and looked
at the various alternatives, we considered a whole range of strategic options.
And as we looked at what was best interest of our shareholders over the long
term and the creation of value, we have consistently stated over time that
redeployment of capital into concentrated core and specialty chemicals was a
very important strategic move. We think it also presents compelling financial
and strategic benefits for our shareholders in that over the long term it will
be a very high value-creating idea for our shareholders.
Laurence
Alexander: And then to the extent that you highlighted sort of rotating into
higher growth markets, do you see any chance for your strategic fit with
Hercules to lead to a higher growth rate in their pulp and paper
business?
Jim
O'Brien: As we look at the opportunities that the Hercules business brings us, I
think they've done a very terrific job, positioned themselves in the various
markets, they have leadership positions, strong adjacency -- adjacencies, and I
believe that we'll be able to build upon on that into the future after we spend
some time paying down some of this debt.
At the
same time, there is tremendous organic opportunities that we can participate in
and help grow these markets, because I think they're well positioned. I think
the combination of water business with their water business, I think gives us
some unique opportunities in the paper space as well as other water spaces. So
we're very excited about that, and I think organically, we're going to be able
to participate in some opportunities immediately.
Laurence
Alexander: And lastly, can you give a little bit more detail on synergies or
cost saving opportunities that you might see in the Aqualon
business?
Jim
O'Brien: The integration teams will address that, but the Aqualon business is a
standalone business, I think run very well. I think it has a very efficient cost
structure, not to say there won't be opportunities to enhance that, but we are
most encouraged by the positioning of that business and the opportunities it
brings us on sustainable chemistries and the markets that they serve and the
adjacent markets that we could ultimately get into. We think it's a gem of a
business and one that can be developed, I think, aggressively and fully into the
future.
Laurence
Alexander: Thank you.
Jim
O'Brien: Thanks.
Operator:
And the next question comes from the line of Mike Harrison from First Analysis.
You may proceed.
Mike
Harrison: Hi, good morning.
Jim
O'Brien: Good morning.
Mike
Harrison: A question for Craig, you've talked about the need for consolidation
in the European paper market in order to maybe alleviate some of the challenges
there. Do you think the combination with Ashland is going to significantly alter
the paper landscape in Europe? Or, should we view it as more of a -- just a --
an expansion of product offering that might improve the combined entity's
position in Europe?
Craig
Rogerson: Well, I think that it certainly enhances our offerings by having an
in-house water component. I don't think it necessarily is inconsistent with
further consolidation of the paper chemicals marketplace. I still think that
that needs to occur, and I think needs to occur for a lot of reasons that I've
spoken about before. But, I think this enhances the Hercules position certainly
as a leader in that market and puts the new Ashland Hercules in a position to
lead in that consolidation effort.
Mike
Harrison: And then, do you -- this is a question for Jim. Do you expect any
changes in Hercules' plans to expand capacity in Aqualon? Or, would you expect
to either accelerate or decelerate those expansion plans?
Jim
O'Brien: As we've sat with Hercules management and with Craig and his team, one
of the primary areas of interest for us is the Aqualon business, and we think it
has probably one of the best opportunities going forward to expand its market
presence and, as I said before, other adjacent moves I think that would take
place.
We are
very interested in the opportunities that business presents, and we will be
examining any type of investment or capital improvement based upon the merits of
what it would return. But, I believe there are many opportunities that we can
help participate in and help the team, motivate them to bring forward. I think
it's, as I said, a wonderful business and with great opportunities.
Mike
Harrison: And then, the last question I had is -- and I know you didn't want to
talk too much about how you arrived at the valuation, but any concern on your
part that Hercules shareholders are going to look at the premium that Dow paid
yesterday for Rohm & Haas and maybe be disappointed with the pricing
here?
Jim
O'Brien: Well, as we've sat and went through the negotiation, I believe that
we've arrived to a fair price. It's a significant premium. It's a 38% premium on
Hercules' closing on July 10th and, as we said, the 26% premium, 30-day average,
and it's at eight times 2008 street EBITDA. So I think it's a fair price and one
that is well within market. And I can't comment on how Dow looked at their
opportunities and why paid what they did.
Mike
Harrison: Fine, thanks very much.
Jim
O'Brien: Right, thanks.
Operator:
And the next question comes from the line of Rob Felice from Gabelli &
Company. You may proceed.
Rob
Felice: Hi, guys. A lot of my questions have been answered, just one or two
more. The combined company really creates a nice set of specialty chemical
assets. But after the combination, 40% of Ashland's revenue will still come from
distribution in Valvoline, which one could argue are really non-core to the
future growth of the Company. So to that end, could you discuss whether you're
considering monetizing those assets in an effort to reduce debt at a quicker
pace and perhaps any other portfolio reshaping we should -- we could
expect?
Jim
O'Brien: As we've said through many conference calls and presentations, one of
our primary objective was to center a specialty chemical core, and I think this
transaction now creates that center. As we look at Valvoline distribution, we
see them as complementary adjacencies to the specialty chemical core. So at this
time, we are not contemplating sale of any of our operating segments, and we
think that they bring us capabilities and logistical efficiencies that in their
current design and how they would relate to the core I think add value. So
that's how we are going to move forward as far as forming the portfolio and how
we look at the companies today.
Rob
Felice: So to that end, are there synergy opportunities with
distribution?
Jim
O'Brien: I would say that we know that Hercules uses certain distributors for
certain products, not to say that we would disrupt that, but we would certainly
look at everything as we go into the combination and where we could create value
for our shareholders. And if we think that that would create some value, we
would certainly give it a hard look.
Rob
Felice: Okay. And then I guess lastly, Craig, I know there's been a couple of
questions on the valuation side. If I look at recent transaction multiples in
the specialty chemical space, they've ranged from nine to 12.5 times trailing
EBITDA. And as one of the callers noted earlier with yesterday's notable
transaction between Dow and Rohm & Haas, and this acquisition values
Hercules at just around 8.5 below the low end of the range. So I was hoping you
could comment on the valuation and the process by which the deal was
consummated.
Craig
Rogerson: Well, the process is -- from the Hercules side is much as -- is much
similar to how Jim explained it from the Ashland side. He spent a lot of time
looking at opportunities we had to create value for our shareholders from the
acquisition side, from continuing our growth strategy organically, as Jim
mentioned, we've got a good plan around that, and looked at the future of
Hercules and where it best fit and where we created the most value for our
shareholders in looking at this opportunity and looking at the -- looking at it
relative to some of the other options that we were trying to explore. We think
this is a -- creates significant value for our shareholders and is a good
deal.
Rob
Felice: Great. Thanks, for taking my questions.
Jim
O'Brien: Sure.
Operator:
And the next question comes from the line of Christopher Miller from JPMorgan.
You may proceed.
Christopher
Miller: Good morning, just wanted to follow up. I appreciate a lot of the color
you've provided on the financing. I'm hoping you could maybe clarify a little
bit structurally as well. Is it currently contemplated that the debt will be
issued out of Ashland, Inc.? And secondarily, what are the current plans to do
with the existing Hercules debt?
Lamar
Chambers: It is contemplated that the debt will be issued through Ashland, Inc.
We will be attempting to roll over some of the Hercules debt, keep that as is.
And some of it, based on the terms of that debt, simply will not be able to be
rolled over, will need to be retired at closing.
Christopher
Miller: So you'll be refinancing all of the Hercules debt as well?
Lamar
Chambers: Essentially all of it, yes.
Christopher
Miller: Okay, great. Thank you, so much for that clarification. I appreciate
it.
Operator:
And the next question comes from the line of David Begleiter from Deutsche Bank.
You may proceed.
David
Begleiter: Thank you, a question for Craig. Craig, you've been adjusting for the
asbestos tension in FX swaps. You had about 9.6 times '08 EBITDA, 9 times '09.
You're stock was about $20 back in early June. Why did the Board feel a need to
sell the stock for a -- 10% above the price a month ago? Was something
structurally changed in the business? We saw -- or what we know about, your raw
materials and demand weakening?
Craig
Rogerson: No, there's nothing -- David, there's nothing that structurally
changed in the business. We remain optimistic about the business. We look at our
-- we looked at this evaluation of value creation, looked at our five-year plan,
and from a number of different methods including discounted cash flow method,
valued that plan and looking that plan, the risks associated with that plan. And
certainly the risks now are different than they looked six months ago. And that
could change two years from now, but we rolled that into our thinking on the
assumptions.
And when
the Board and I and the rest of the management looked at that assessment, we
determined that for the shareholders and for the continuity of the businesses
going forward, the growth of the businesses and the people at Hercules, this was
a good opportunity that we should take advantage of.
David
Begleiter: Was this an auction process at the end? Did you solicit other bids
from other parties?
Craig
Rogerson: It wasn't an auction process, but we -- the Board certainly satisfied
its fiduciary responsibilities and looked at what other options there were to
create more value, or similar value, and we took the options we thought offered
the best overall value for our shareholders.
David
Begleiter: And lastly, this -- if we rolled back the clock until -- to late May,
with your stock above $20, would you have taken the same deal here? Can you say
that, at $23?
Craig
Rogerson: It's a good question, but hypothetical. I'm not sure. The situation
changed significantly over that time. We weren't presented with the opportunity
when we were at $20, so I'm not sure how to answer your question.
David
Begleiter: Understood, thank you.
Craig
Rogerson: Yes.
Operator:
And the next question comes from the line of Andy Baker of Jefferies &
Company. You may proceed.
Andy
Baker: Thank you very much. Just a question, you mentioned in the press release
the $75 million reverse termination fee if the finance commitments fall through.
Are there any specific initiatives you can tell us about, market [debts] and the
like that would lead the -- that we should be -- look out for to see how those
commitments are going to play out from here?
Jim
O'Brien: We expect to close by the end of 2008. I think that's a very important
point. The full expectation here, we have secure financing. We have it locked to
the end of the year, and we fully expect to close. And if for some reason we
don't close, then the financing terms could be renegotiated and if we can't find
comparable financing, then we'd have the option to terminate. So that's what
that language is for is to describe what would happen if for whatever reason we
don't close by the end of 2008. But the important point is, we fully expect to
close.
Andy
Baker: But, do the banks have a market out or any other type of --?
Jim
O'Brien: No. No, we have locked financing through the end of calendar 2008. So
all of that is reference to what happens if it rolls into January 1,
2009.
Andy
Baker: Thanks. And as we saw with yesterday's Rohm & Haas/Dow Chemical deal,
the -- they actually gave a specific carve-out for divestitures in terms of a
certain limit. Does your merger agreement have any limitation on the amount of
divestitures that you would be required to make in order to get the deal
done?
Jim
O'Brien: No, none.
Andy
Baker: Okay. Thank you, very much.
Jim
O'Brien: Yes.
Operator:
And the next question comes from John McNulty from Credit Suisse. You may
proceed.
John
McNulty: Yes, good morning. Just two quick questions, with regard to the $50
million synergy target, it looks like that's about 2% or so, maybe a hair over,
of Hercules' sales, which sounds like it's actually a pretty light number
compared to maybe past acquisitions and synergies from them. So what I'm
wondering is -- is that because it's a function of there not being a tremendous
amount of overlap between the companies? Or, is it more of a -- just a very
conservative number? How do you think about the synergies and what the potential
upside to them might be?
Jim
O'Brien: As we went and looked at our model, we put in very conservative
synergies. We think the $50 million, we have already identified how we would go
about it as far as back room overhead, integrated technology platforms, raw
material procurement, freight logistics, those type of things.
But as we
put these consolidation teams together, the integration teams, one of the tasks
that they'll have is to continue to look for synergies and the opportunities to
reduce cost. And I would fully expect that we would improve on that $50 million.
But as far as something that you can count on in your models, I think we're very
conservative, and I think it's very likely that we will achieve that. And
hopefully, there'll be more as we get into it.
John
McNulty: Okay, great. And then the only other question was, with regard to the
new kind of Ashland and Hercules paper and water treatment business combined,
are there any either competitive issues or potential opportunities that you see
with regard to GE, given that Hercules has a water tolling arrangement with
them? They sold them the Betz-Dearborn business. Can you talk about what either
hurdles or opportunities there might be with that, if there are
any?
Jim
O'Brien: Well the opportunity is, we're going to combine those two businesses.
And Paul Raymond, the President of Hercules' Paper Technology & Ventures
group is going to run that business. So as I see the opportunity, we are going
to continue with the turnaround that we're putting in our business as far as all
the initiatives, all the things that we said we were going to do. We're going to
continue to do that over the next six months and complete that.
So as we
combine their business with ours, I think ours will be a better business at that
time. We will look at the opportunities and the synergies of putting those two
businesses together, and my expectation is is that we will find market
opportunities, additional cost synergies as well as adjacent moves that we could
make off of that combination, because we're going to have a much broader
technology base and a broader market base to drive from.
How that
impacts the GE relationship, I'll have to count on Paul to sit there and figure
out which parts do we keep, not keep, and all that. That's yet to be
determined.
John
McNulty: Okay, great. Thanks, a lot.
Jim
O'Brien: Yes.
Operator:
And the next question comes from the line of Steve Velgot. You may
proceed.
Steve
Velgot: Thank you, a couple of questions. First is, I just wanted to clarify the
calculation of debt to EBITDA at close of 3.2, 3.3. I take it that is not net of
cash. Can you just confirm that for me?
Lamar
Chambers: That is correct. It's not net of cash. That would be debt on the
balance sheet. Of course, we would expect much of the cash that's on Ashland's
balance sheet today to be used as part of the acquisition consideration, so
--.
Steve
Velgot: Sure, okay. And the next question is for Jim. Just concerning the
distribution business going forward, are there any issues with products that
you're currently distributing from some of Hercules' competitors that might be
in some jeopardy, given this combination?
Jim
O'Brien: Possibly, and as we would look at that, if we would lose certain
product lines or certain products, if it's -- conflicts with what Hercules had,
then we have the opportunity to pick it up on the other side. But I would not
think it's significant, and I don't think it would have a significant impact on
the distributions' earnings.
Steve
Velgot: Thank you.
Operator:
And the next question comes from the line of David Troyer from Credit Suisse.
You may proceed.
David
Troyer: Hi. You already talked about the commitments, the financing commitments
to the end of the year. That's maybe a little bit unusual, but it -- I suppose
it begs the question if you could talk in more granularity about the process
between now and closing. What are specifically some of the obstacles to
overcome, and maybe more clearly identify when you would expect to close so we
can gauge kind of the safety net to the end of the financing
commitment?
Jim
O'Brien: Well, as we look at the obstacles to close, obviously there are the
standard obstacles. You had to file the government registrations. You had to get
through the competitive analysis, and we think there is very little issue if any
there. So we think that will go fairly quickly and without much
discussion.
So as we
look at the timeframe and the timetable, we think that it's very doable, and we
think we actually have a cushion inside of the timeframe that we described of
trying to meet it by the end of December. So as we have anticipated the process,
we're hopeful that sometime Novemberish, this thing will close. And we think
that that's given all the steps that are necessary to go through. That would be
our anticipation.
David
Troyer: Okay. And then on the commentary about the Hercules debt, the vast
majority being refinanced, I would assume that's [your fringe] of the bank debt
and the 6.75 that have covenants would be the debentures that -- associated with
the crests. Would those -- would you expect those --?
Jim
O'Brien: Lamar?
David
Troyer: Remain outstanding?
Lamar
Chambers: Our intent and hope at this time would be to roll over the
subordinated notes, the crests, and keep those.
David
Troyer: Okay. And would the new bank -- or sorry, the new financing in whatever
form it takes, do you expect it to rank senior to the crests? The debentures, or
--?
Jim
O'Brien: Yes.
Lamar
Chambers: That's correct, yes.
David
Troyer: And then, could you just remind what the restricted payments basket is
in this -- in the 6.75?
Lamar
Chambers: I'm sorry. We don't have that information here at this time, and
obviously as we move forward with the transaction, there will be more details
available around the financing and the specific terms of the instruments. But at
this time, we don't have that information.
David
Troyer: And if you mentioned it I apologize, I missed it. Do you -- have you had
a discussion with the rating agencies? Any indication of what the initial rating
might be?
Lamar
Chambers: We have had discussions with the rating agencies, as you might expect.
And of course, they'll have to make their final assessment at the time the
transaction closes. It -- there is a likelihood that we might see a one-notch
downgrade as a result of this transaction. But of course, that will be theirs to
determine, but our expectation is and it's built into our financing models that
there would be a one-notch downgrade from both the major agencies.
David
Troyer: Are you prepared to talk about the mix of the new financing and how
much, if any, is secured? How much is unsecured?
Lamar
Chambers: Not at this time, and -- but, they'll -- we'll have to get more into
detail on that as we get closer to the transaction. As you might expect, some of
the commitments allow flexibility at this stage in moving between the
tranches.
David
Troyer: Okay, great. Thank you, very much.
Operator:
And the next question comes from the line of Bill Hoffman from UBS. You may
proceed.
Bill
Hoffman: Yes, good morning. Just a question on legacy costs and capital spending
on a combined basis, I wonder if you'd just give us some thoughts on what you --
where you expect those cash needs to be, first legacy and then second, capital
spending?
Jim
O'Brien: On the legacy costs, as I mentioned in the presentation, we had spent a
lot of time on due diligence, understanding fully all the various legacies that
Hercules brings forward as a corporation, and it was months and months and
months. This was not something that was taken over a weeks period.
It was
over a several-month period, and we became satisfied that we understand the
broad implications of it. We've put our own models in place as far as we put it
into the evaluation, and we believe we have it covered from a statistical basis
on what we believe it will cost us over time and what the present value of that
would be in our model.
So from
that standpoint, you never know everything, but I can tell you that the Hercules
people were very open, very thorough and really spent the time with us so that
we could understand it. So from that standpoint, I would say we feel
comfortable. On the investments going forward --
Bill
Hoffman: Do you --?
Jim
O'Brien: On capital spending, we're going to have to be very selective because
our primary objective in the near term will be to pay down some of this debt. So
we will have -- we will have capital spending, obviously. It probably won't be
as much as our businesses would like to have, but we will have our primary focus
on paying down the debt, and we will also obviously have focus on looking at the
best projects available and fund them.
Bill
Hoffman: Thank you. Just on the legacy costs, the -- we've -- the Hercules folks
have historically been pretty good at providing guidance on theirs. I guess that
we're just looking to get some guidance from you on the Ashland
side.
Lamar
Chambers: We have pretty extensive disclosures, as you know, regarding our
legacy matters, particularly I assume you're referring the asbestos and
environmental issues. And our trend line's been quite favorable, if you've been
monitoring our disclosures in those areas. And we feel like we've got a -- we've
got those properly reflected and disclosed.
Bill
Hoffman: Okay, thank you.
Operator:
And the next question comes from the line of [Ali Levine] from [Shakeman
Capital]. You may proceed.
Ali
Levine: Hi, yes. My questions have basically been answered, but just to confirm,
following up on David Troyer's questions, it sounds like the junior subnotes
will stay outstanding, you plan on refinancing the bank debt in the 6.75. Could
you just confirm that?
Lamar
Chambers: I apologize. I'm sorry. I didn't mean -- fully understand your
questions. Could you repeat that?
Ali
Levine: You plan on just a refinancing of the Hercules debt? You plan on
refinancing the bank debt and the 6.75 notes?
Lamar
Chambers: Yes, that's correct.
Ali
Levine: Okay. And then in terms of the leverage that you gave, the 3.2 times,
3.3 times, I guess I'm coming up with a little bit different calculation. How
much cash pro forma do you expect to be outstanding after this
transaction?
Lamar
Chambers: We won't get into the specific projections around cash balances at
this point in the closing, but 3.2 to 3.3 would be -- will be the balance sheet
debt at the time of closing based on our best estimate of where that's going to
be, and that's essentially all of our cash would be used toward the transaction
consideration.
Ali
Levine: Okay, thank you very much.
Jim
O'Brien: We have time for one more question so far.
Operator:
And the last question comes from the line of Mr. [Brad Logato] from [Igens]. You
may proceed.
Brad
Logato: Hi, guys. Most of my questions have been answered. I just wanted to see
what your intentions were with respect to the preferred. I'm assuming that
that's going to remain outstanding as well.
Jim
O'Brien: Could you repeat that question again, please?
Brad
Logato: Most of my questions were answered. I was just seeing how you guys were
going to address the preferred that's outstanding. I'm assuming it's going to be
rolled over as well.
Jim
O'Brien: We were -- we're have -- we're sitting with a little loss. We don't
know what preferred you're talking about.
Brad
Logato: I'm sorry, the Huntsman preferred -- I'm sorry, the Hercules
preferred.
Lamar
Chambers: Are you talking about the subordinated notes?
Brad
Logato: Yes, that's correct.
Lamar
Chambers: Yes. As we said earlier, the -- our intent will be to roll those over,
and those would likely remain outstanding.
Brad
Logato: All right, thank you.
Jim
O'Brien: Okay, great. Well, thank you. Thank you all very much, and we'll look
forward to talking to you in the future.
Operator:
Thank you, ladies and gentlemen. This concludes the presentation for today. You
may now disconnect.