Eastman Chemical Company (EMN) announced the public offering of $1 billion 2.4% notes due 2017, $900 million 3.6% notes due 2022 and $500 million 4.8% notes due 2042. The proceeds from the issue would be used for paying a portion of the consideration related to the company’s pending purchase of the chemical company Solutia Inc. (:SOA). The offering is expected to close on June 5, 2012.
Eastman recently got the nod from the European Commission to acquire Solutia for a consideration of $3.4 billion (excluding $1.34 billion of Solutia’s outstanding debt), which would be paid in cash and stock. The deal is expected to close in mid-2012 and Eastman anticipates the acquisition to be accretive immediately following its closure.
According to Fitch Ratings, the notes would rank at par with the company’s existing debt of $1.6 billion. However, the Rating Outlook assigned by Fitch was Negative.
The primary reason behind the negative outlook is the debt-heavy method being used by Eastman to finance the deal. The company will finance 75% of the deal through debt, apart from the equity and cash that it would be offering. This would take the company’s gross debt to $5.1 billion from the $1.6 billion currently sitting on its books.
However, owing to its strong liquidity position, Fitch approved of Eastman’s ability to meet its near-term debt obligations. The company had $649 million in cash and cash equivalents as of March 31, 2012, along with an untapped revolver of $750 million and an unused $200 million in its accounts receivable securitization facility.
Eastman’s move to acquire Solutia is in accordance with its inorganic growth objectives and seems to be a smart move. Solutia is amongst the leading companies engaged in performance materials and specialty chemicals with a strong presence in the Chinese market. Thus, the deal will help strengthen Eastman’s foothold in the region.
Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses, is driving earnings. The company benefits from business restructuring and cost-cutting measures. It has sold unprofitable units and closed down the poorly performing ones. The impending acquisition is expected to further strengthen the company’s earnings power.
The company, which competes with The Dow Chemical Company (DOW) and E. I. du Pont de Nemours and Company (DD), holds a short-term Zacks #3 Rank (Hold). We currently have a long-term Outperform recommendation on the shares of Eastman Chemicals.Read the Full Research Report on SOA
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