21 May DOES HE MAKE A GOOD CASE FOR RELATED DIVERSIFICATION?
Ecolab to Buy Chemical Firm Champion Technologies
By
BOB
TITA
Ecolab Inc. ECL +2.35% has agreed to buy chemical maker Champion Technologies in a $2.21
billion cash-and-stock deal that will move the cleaning-products company deeper into the
chemical market for the energy industry.
The purchase follows Ecolab’s acquisition last year of the Nalco Holding Co. for $5.6 billion.
The addition of Nalco marked Ecolab’s expansion beyond its traditional business of
manufacturing disinfectants and detergents for restaurants, hospitals and other institutions. Nalco
makes water-treatment chemicals used by oil and natural-gas producers, the paper industry and
other companies that consume or extract water.
"The Nalco integration has gone extremely well," Ecolab Chief Executive Doug Baker said in an
interview. "Champion has been on our list of opportunities for awhile. We’re very confident that
we can manage it."
Houston-based Champion manufactures a suite of chemicals used in operating oil and naturalgas wells. The privately owned company’s sales have been growing at 13% a year and are
expected to reach $1.4 billion this year. Champion’s operating income this year is projected at
about $160 million.
Ecolab, whose largest shareholder is an investment firm controlled by Bill Gates, said that
following the acquisition, energy-sector sales will account for 25% of its annual revenue, up
from 17% currently. Moreover, the deal will increase Ecolab’s exposure to the North American
energy market, where drilling for oil and natural gas has been increasing with greater use of
unconventional methods, such hydraulic fracturing of shale rock. About 70% of Champion’s
annual revenue is from North America.
"It looks like a good complement to what Nalco was offering in energy," said Jeffrey Stafford, an
analyst for research firm Morningstar Inc. in Chicago. "They were a little bit light in the North
American shale market."
Mr. Baker said the addition of Champion won’t significantly alter Ecolab’s business model as an
annuity-type of company that is able to consistently deliver high margins from sales that are
about 90% recurring, as customers routinely consume and reorder Ecolab’s products.
"Champion has the same business model, which is why we felt comfortable doing" the purchase,
he said. "The business-model connectivity is important to us."
Ecolab, based in St. Paul, Minn., expects to complete the Champion purchase by the end of the
year. It will pay Champion about $1.7 billion in cash and issue eight million shares.
Champion is expected to add 12 cents to Ecolab’s per-share earnings in 2013. That is projected to
grow to about 50 cents by 2016 as Ecolab ratchets up cost-saving synergies to $150 million a
year by 2015 from $50 million in 2013.
Ecolab’s reputation for being well-managed has helped to ease investors’ anxiety about the
company’s expansion strategy. The company’s stock is up 27% in the past 12 months. On Friday
the shares rose 4% to $66.24.
The company’s largest shareholder is Cascade Investment LLC, an investment firm controlled by
Mr. Gates, the Microsoft Corp. MSFT +0.83% co-founder. It owns just under 10% of Ecolab
stock. The Bill and Melinda Gates Foundation Trust also has a 1.5% stake in the company.
Ecolab revealed earlier this year that it had allowed Mr. Gates’s investment entities to acquire up
to 25% of Ecolab’s stock.
On Friday, Ecolab also said it expects adjusted earnings for its third quarter to be 87 cents, which
is at the high end of its previous range. Wall Street analysts were expecting the company to earn
86 cents a share. In July, Ecolab reported second-quarter earnings rose 47% as the company
booked record sales following the Nalco purchase.
Ecolab to Buy Chemical Firm Champion Technologies
by: Bob Tita
Oct 15, 2012
TOPICS: Diversification, Corporate Strategy
SUMMARY: Ecolab is expanding beyond its traditional business of disinfectants and detergents for restaurants,
hospitals and other institutions. Ecolab has now agreed to buy chemical maker Champion Technologies in a $2.21
billion deal that will move the cleaning-products company deeper into the chemical market for the energy industry.
Champion manufactures a suite of chemicals used in operating oil and natural-gas wells. "Champion has the same
business model, which is why we felt comfortable doing" the purchase, the CEO said. "The business-model
connectivity is important to us." Ecolab has already acquired Nalco, a maker of water-treatment chemicals used by oil
and natural-gas producers, and the integration went well.
QUESTIONS:
1. In which industry and industry segment does Ecolab have its original core business? What does Ecolab sell? To
whom does Ecolab sell?
2. In which industry and industry segment does Champion Technologies operate? What does it sell? Who are the
firm’s customers?
3. How related are these two different markets? How related are they in terms of technology? How related are they
in terms of customer base? Based on these considerations, does the acquisition represent a case of related or
unrelated diversification?
4. The CEO of Ecolab actually mentions another kind of relatedness. What is it? How does he explain the issue? Is
his argument persuasive? Does he make a good case for related diversification?
5. How lucrative does the business of Champion Technologies look to be for Ecolab? If you were to do a Five Forces
Analysis of the industry segment that Champion Technologies is in, would you conclude this is an attractive or
unattractive industry segment?
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