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Evonik unit sale, prospect of cash-flow gains boost shares

FILE PHOTO: The logo of German specialty chemical company Evonik Industries AG is pictured at their plant in Bitterfeld, Germany, February 29, 2016. REUTERS/Fabrizio Bensch/File Photo

By Ludwig Burger

FRANKFURT (Reuters) - Shares in German chemicals group Evonik jumped to a three-month high on Tuesday after it sold its clear acrylic sheet unit for a larger-than-expected sum of 3 billion euros (2.6 billion pounds) and allayed investor concerns about its cash flow.

Late on Monday, Evonik said it had agreed the sale of its methacrylates plastics unit to buyout group Advent for an enterprise value, which includes debt, of 3 billion euros - comfortably more than the 2-2.5 billion euros that had been expected.

"Divesting a commodity business for 10 times EV/EBITDA at this point in the cycle is impressive," said Bernstein analyst Gunther Zechmann, citing expected 2019 earnings before interest, tax, depreciation and amortisation (EBITDA) for the unit of 279 million euros.

The company's shares were 5 percent higher at 26.8 euros by 1453 GMT, off their best levels of the day but still the best performers by far on Germany's mid-cap index.

Evonik, which has drawn criticism from analysts for pushing the limits of its dividend to cash-flow ratio, said on Tuesday that 2019 cash flow after investments in plants and gear would be significantly higher than the 672 million euros generated in 2018.

"The debate over our ability to pay our dividend from the free cash flow, is over," Chief Executive Christian Kullmann told a press conference.

Cash flow would be boosted by lower requirements for working capital and pensions, the company said.

In its fourth-quarter results release, Evonik said it would start paying part of its retirees' pensions out of dedicated pension plan assets this year, two years earlier than initially planned, citing a better-than-expected investment performance of the portfolio.

Advent, which already owns other chemical companies, is financing the deal with 800-900 million euros of equity and 1.4-1.5 billion euros in debt and also taking on pension liabilities of 600 million euros, a person familiar with the matter said.

Evonik said adjusted EBITDA in 2019 would be flat at best but could decline by as much as 10 percent due to political uncertainties and weaker economic growth.

However, it added that the projection did not take into account the $625 million purchase of bleaching agents maker PeroxyChem or the agreed sale of the methacrylates unit.

"The focus today will be on the strong 2019 free cash flow guidance, ... the significant improvement in Evonik’s pension liabilities, which were always a struggle, and the better than expected proceeds from...the methacrylates business," said Baader Helvea analyst Laura Lopez Pineda.

Quarterly adjusted core profit edged 1 percent higher as strong demand for coating additives and engineering plastics offset a decline at the methacrylates business.

Barclays and Baker McKenzie advised Evonik on the deal, while Advent worked with Bank of America and Freshfields.

Barclays, Bank of America, Goldman Sachs and Deutsche Bank are financing the transaction.

(Additional reporting by Matthias Inverardi in Essen, Arno Schuetze in Frankfurt, editing by Riham Alkousaa, Louise Heavens and Kirsten Donovan)