Fool's Eye View

[ September 25, 2000 ]

Laporte Goes Specialist Organic

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- It was interesting to read the opening line of Laporte's (LSE: LPRT) press release this morning, "Laporte announces its intention to focus its future development on Speciality Organics." The initial thought is: why would a chemicals company suddenly decide to embrace the organic market? Has Laporte suddenly had a conversion to ethical environmental policies? Are we likely to see it opening up specialist organic fruit and veg shops? Are we to see it moving quickly into organic farming? No, of course not. They are clearly referring to "organic" in a different way than most consumers would!

What is actually happening?

Basically, Laporte is selling more than half of its existing business to American venture capital company Kohlberg Kravis Roberts & Co. (KKR) for $1.18 billion in cash, equivalent to about £810 million. Laporte will then focus on its speciality chemicals division. KKR is taking on businesses with a combined turnover of £494 million, and this includes all of Laporte's pigments, additives, compounds, water technology, timber treatment and electronic divisions. The bit that will remain is the "Speciality Organics" division, which makes pharmaceutical raw materials as catalysts for the oil industry, chemicals that help to trigger the conversion of petrochemicals into plastic.

This is a very significant move for Laporte, which says that it will use the proceeds of the sale to reduce its debt and return about £200 million pounds to shareholders. On Friday the whole group had a stock market capitalisation of £833 million, so raising £810 million by selling of 50% of the business looks a pretty shrewd move, especially as the businesses that remain look to be highly attractive. At the end of last year the group had net debt of £478 million. Assuming this has not changed, and following the return of £200 million to shareholders, the group will have cash remaining of about £132 million. After today's sharp rise in the share price the total market capitalisation of the group is about £1 billion, which gives a total value on the remaining businesses of some £768 million. Last year this division made a total profit of nearly £71 million, so the market effectively values this at just 11 times profits -- remember that KKR has willingly paid £1.23 billion for a group of companies that made a profit last year of about £87 million, or nearly 14 times profits. Does this imply that Laporte is now undervalued?

What will it do next?

The question that should be foremost in Laporte shareholders' (and potential shareholders') minds is: what will the company do with its £132 million in cash? There is no point simply shoving it into a bank account and letting it earn interest. It would be better returned to shareholders. Undoubtedly Laporte will use the money to make acquisitions in the specialist organics area. Finance Director Michael Kayser says that taking cash in the bank and borrowings, Laporte will have £250 million to spend on acquisitions. But will it be able to spend the money wisely? It may be that the new slimline Laporte will become an attractive acquisition target itself.

Where Next?

Sector Dissector -- Chemistry Lessons
Laporte website
Laporte discussion board
Chemical Sector discussion board