(By Mani) Ecolab Inc. (NYSE: ECL) will pay $2.2 billion for privately held Champion Technologies, boosting its rapidly growing global energy segment by approximately 60 percent.
While preferring more time to digest the transformative Nalco merger, the timing was dictated by the selling families' tax planning, and the company believed that Champion was too attractive to pass. Ecolab disclosed that it had long targeted Champion.
"The company had already crossed the cyclicality threshold, so Champion should not impact ECL's valuation, while it is accretive and a tight fit with Nalco," Oppenheimer analyst Edward Yang said in a client note.
The company outlined the $150 million in synergies,including $60 million from SG&A, and another $60 million in supply chain. Champion's employees generate $424,242 in revenue per employee vs. $611,111 per employee for ECL's Energy unit.
ECL will also bring in-house Champion's tolled or outsourced blending and distribution outside of North America.
"On the growth side, Champion increases ECL's Energy exposure by 8 percent to 25 percent of revenue, geographically shifts 2 percent from Europe to North America, and provides an array of strong technologies in oil and water separation, stimulation and deposit control (hydrate and sour corrosion inhibitors, clay stabilizers)," Yang said.
Ecolab expects to maintain its strong investment-grade credit-rating post-acquisition and is planning to return to ‘A range' metrics within the next three years. Returns on invested capital are also expected to show sustained improvement going forward.
Ecolab trades at 19.8 times its estimated 2013 EPS, a 20 percent discount to its ten-year average, with strong annuity-like businesses centered on water, energy, and food safety.
St. Paul, Minnesota-based Ecolab offers cleaning and sanitizing programs and other services to the foodservice, food and beverage processing, hospitality and other sectors. The company serves several other end markets, including water treatment, pollution control and energy conservation.
"ECL is a compelling growth investment, in our opinion, with a dominant franchise that normally doubles EPS every five years, has generated high 20 percent-plus returns, and is still in the early stages of its market opportunity," Yang noted.
Including Nalco, Ecolab has only 11 percent of a highly fragmented $100 billion global addressable market, while its business model based on high-touch services is a powerful competitive advantage. In addition, the company has consistently generated above-GDP growth throughout the cycle and typically has outperformed.