Rockwood Gets Its Deal For CeramTec

By Stephen D. Simpson, CFA | June 17, 2013 AAA

Rockwood Holdings (NYSE:ROC) hasn't been shy in talking about its intentions to simplify its operations around its high-quality lithium business and is surface treatments business. With Monday's announcement of the sale of CeramTec to a private equity buyer, Rockwood has taken a major step toward that vision. While I would have preferred to see Rockwood keep CeramTec, the company got a good price and should be relatively close to a sale of the titanium dioxide and performance additives businesses, which will free the company to repay debt and pursue M&A to beef up the surface treatments operations.

SEE: Cashing In On Corporate Restructuring

A Good Deal For A Good Business
Rockwood announced that it had reached an agreement to sell CeramTec to Cinven, a private equity group, for nearly $2 billion in cash. Cinven has already announced that it has raised about two-thirds of the needed funds through a consortium of Deutsche Bank, RBC, and UBS.

At nearly $2 billion, Rockwood is selling CeramTec for more than 11 times EBITDA and about 3.5x trailing sales. Rockwood acquired CeramTec in a package deal back in 2004. While the deal announcement back then did not assign separate values to the four businesses, CeramTec was 18% of the acquired revenue. Assuming that all of the businesses merited identical multiples (which I do believe is a stretch), Rockwood nearly quadrupled its money on this business.

There are relatively few publicly-traded comps for CeramTec, so comparing the valuation for this deal is a little challenging. Rockwood is getting more than twice the EBITDA multiple that 3M (NYSE:MMM) paid for Ceradyne, but Ceradyne had larger exposure to slower-growing industrial markets and a very large exposure to the challenged defense market. Similarly, Kyocera's (NYSE:KYO) business is not the best comp to CeramTec from a product/product market standpoint, but here again Rockwood garnered about twice the going EBITDA rate (and CeramTec's EBITDA margin is about 2.5x greater).

CeramTec was a quality asset for Rockwood. In the nine years or so that Rockwood owned it, the sales doubled. CeramTec had contributed about one-quarter of Rockwood's trailing EBITDA, with a margin of approximately 33%. With its abilities in high-quality ceramics, CeramTec not only addresses traditional ceramics markets like cutting tools, but also markets like healthcare where it is the only supplier of ceramic materials for hip implants (and human trials of all-ceramic knee implants using CeramTec materials are underway).

SEE: EBITDA: Challenging The Calculation

TiO2 And Performance Additives Up Next
This is clearly not the last divestiture that Rockwood anticipates. While Rockwood has acknowledged the possibility that it may need to float these businesses through a public offering, recent news reports and analyst reports have suggested that bundling them together should lead to a buyout transaction. Here again, this sales process is not new – the company has been talking about a sale/spin-off of the titanium dioxide business for a while now. It's a different sort of TiO2 business, though. Unlike DuPont (NYSE:DD) and Huntsman (NYSE:HUN), Rockwood's business is more focused on anatase products – a more expensive type of TiO2 than the commodity rutile TiO2.

These combined businesses (TiO2 and performance additives) account for another third of Rockwood's EBITDA, so it's clear that the company is shedding major contributing assets. With over $1.7 billion in net debt, though, there's certainly room to shore up the balance sheet and direct surplus funds towards deals that could bulk up the cash-producing surface treatments business.

The Bottom Line
Rockwood has an excellent lithium business, and management clearly believes this is where some of its best growth opportunities will be in the coming decade. Along with Sociedad Quimica y Minera (NSYE:SQM), Rockwood controls more than 50% of the world's lithium supply, with high-quality, low-cost assets in Chile's Atacama Desert.

As I said before, I would have liked to have seen Rockwood keep CeramTec. It's harder to complain, though, when the company gets a solid multiple for a business that management sees as non-core to its long-term objectives. Rockwood has a nearly identical trailing EBTIDA multiple and trailing 12-month stock performance to PPG (NYSE:PPG), another chemical company that has decisively refocused its operations around specialty chemicals. I don't see Rockwood as a huge bargain today (particularly as the CeramTec deal will be harmful to margins), but the long-term potential for lithium in advanced batteries makes this a name well worth following.

At the time of writing, Stephen D. Simpson owned shares of 3M.

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