Chemicals giant Elementis (ELM) has struck revised terms for its proposed takeover of Mondo Minerals. The new deal will see the UK chemicals company pay $500m for the business on a cash/debt neutral basis instead of the $600m initially agreed at the end of June.
Mondo Minerals is a producer of industrial talc additives and operator of four talc mines in Finland.
The new deal will also include up to an extra $53m in earn out payments, if certain performance targets are met over the next three years.
These are demanding targets that call for the business to grow adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) by a minimum of 30.1% this year, 41.2% in 2019 and 60.5% in 2020.
Missing those targets will mean no extra cash will be paid, and even faster growth will be required for the maximum earn out to be triggered.
WHY A NEW DEAL HAS BEEN STRUCK
Elementis shares have fallen about 13% to 246.2p (including today's 2.6% decline) since it first announced an agreement to buy the Mondo Minerals business from its private equity parent Advent International more than two months ago.
At the time it was believed that Elementis shareholders were not entirely behind the original agreement, with speculation running through the City that the asking price was too high. This may explain why a revised sale price has been negotiated, although the fall of the pound versus the dollar since then may also be a factor.
A one for four rights issue to raise $230m is in the works to help pay for the acquisition of Mondo, pitched at 152p.
EARNINGS ACCRETIVE
Elementis claims that Mondo will be a good fit for its own business. The company view is that Mondo’s talc can be a useful addition for coatings, paint and long-life plastics that Elementis itself manufactures.
Numis analyst Kevin Fogarty says the acquisition is anticipated to be accretive to earnings in its first full year with ‘modest’ pre-tax cost synergies.
The deal will extend the company's borrowings to about 2.5-times EBITDA initially, even with the rights issue funding. But analysts believe cash generation from the combined business will allow repayments to cut leverage to more comfortable levels of around two-times EBITDA by the end of 2019.
