Lubrizol Corporation (NYSE:LZ) -- Fallout From the Lost Cognis Bid

Lubrizol Corporation (NYSE:LZ), a specialty chemical company for the industrial, transportation, and consumer markets, recently failed in its bid to buy Cognis, a chemical manufacturer headquartered in Germany. Agora Financial editor Dan Amoss explains what the lost attempt tells us about Lubrizol’s current prospects.

From his recent reader update:

“The Wall Street Journal reported that Lubrizol (NYSE:LZ) lost in its bid to acquire specialty chemical maker Cognis GmbH.

“BASF, the German chemical giant, is the reported winner, with a €3.1 billion bid. This bid was considered superior to Lubrizol’s bid — a reported €3.3 billion — because BASF’s huge balance sheet ensures closure of this deal. Plus, Cognis’ owners probably didn’t want to assume the risk of getting paid partially in the form of new LZ shares that likely would have been issued in a secondary offering.

“Cognis makes raw materials for the pharmaceutical, food and beverage, cosmetics, and cleaning products industries.

“The fact that Lubrizol bid so highly for Cognis should concern Lubrizol shareholders. Lubrizol’s enterprise value is just $6.6 billion, so a Cognis acquisition would have been a huge financial and operational risk. Plus, the history of buying from private equity sellers — in this case, Goldman Sachs and Permira — usually isn’t pretty for the acquiring company. Companies sold by private equity typically have very lean operations, assumed too much debt, and scrimped on capital programs.

“We know that Cognis’ balance sheet is highly leveraged because BASF’s bid consists of €700 million for Cognis equity plus the assumption of €2.4 billion of net debt and pension obligations.

“My guess for the reason Lubrizol management bid for Cognis: It wants to diversify away from the boom-and-bust business of making oil additives. Management probably wanted to use Lubrizol’s very expensive stock — now priced at a peak multiple of unsustainable earnings — as a currency to expand its better, more stable specialty chemicals business.

“Now that Cognis is out of reach, Lubrizol management will probably look to spend dry powder on smaller deals. On the latest earnings conference call, the CEO specified that he’s looking for ‘several high-quality bolt-on acquisitions in the $100-500 million range.'”

Dan Amoss expects LZ to break below its current “very expensive stock” price, and has in mind a specific range it will hit within the next six months. Out of fairness to his current subscribers, you’ll have to sign up for his newsletter, the Strategic Short Report, to get his exact recommendation. It’s available through the Agora Financial reports page, which can be found here.


Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]

The Daily Reckoning