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RAG seen buying out Degussa, BASF keen on unit
Fri Dec 16, 2005 11:54 AM ET

DUESSELDORF/FRANKFURT, Dec 16 (Reuters) - Mining group RAG is set to buy utility E.ON's stake in Degussa , giving it near full control of the world's largest specialty chemicals maker, a financial source said on Friday.

RAG [RUHR.UL] already owns 50.1 percent of the 132 year-old German firm and is likely to buy the 43 percent stake held by E.ON, the source said, without mentioning a value for the stake.

Separately, German rival BASF said it was interested in buying Degussa's construction chemicals unit, which analysts say RAG is forcing Degussa to sell in order to help fund its purchase.

Degussa has a market capitalisation of 7.8 billion euros ($9.34 billion), which means that at its current price, RAG would have to pay 3.35 billion euros to buy E.ON's stake.

The source said RAG Chief Executive Werner Mueller would present a plan to his supervisory board on Monday for buying the E.ON stake. He added that E.ON's board would also meet in the early part of the week to discuss the sale.

Analysts expect RAG to take Degussa private, spelling the end of the German industrial icon as an independent company.

E.ON, which has said it wants to sell the stake and give the proceeds to shareholders, declined to comment but saw its shares rise on the news. RAG was not immediately available for comment.

"With RAG's purchase, the promised special dividend payment would move within reach of E.ON shareholders," said Sal. Oppenheim analyst Matthias Heck, adding that this could work out at 5 euros per share.

E.ON shares closed up 3.1 percent at 85.30 euros on Friday, making them the second-highest gainer on Germany's DAX blue-chip index , while Degussa stock finished 3 percent higher at 39.10 euros, among top gainers on the mid-cap index .

E.ON Chief Executive Wulf Bernotat said in a newspaper interview earlier this week that he believed Degussa's current stock price was inflated by takeover talk. Shares in Degussa have risen almost 16 percent in the last two months.


In a separate move seen by analysts as potentially smoothing RAG's plans, BASF said it was interested in acquiring Degussa's construction chemicals unit, which analysts estimate could have a price tag of around 1.8 billion euros.

Newspapers have said Degussa may also sell parts of its fine chemicals unit. Selling the two businesses could fetch Degussa as much as 5.5 billion euros -- but lose the company more than a third in sales.

BASF, the world's biggest chemical maker by sales, said its board had proposed to Degussa that it conduct exclusive negotiations and that it planned to make a concrete offer once a detailed review was complete.

"BASF wishes to start the review as quickly as possible," it said. The unit made an operating profit of 201 million euros last year and employed about 7,400 people.

The deal could be BASF's first sizeable acquisition since its 1.185-billion-euro buy of the fipronil pesticide from Bayer in 2003. The company is faced with the problem of a growing cash pile and too few targets to spend it on.

"This is likely to be earnings accretive right from the start, and will not dilute BASF's operating margin," said a London-based analyst. "And there's not much overlap with the existing businesses."

BASF shares ended trading 1.9 percent higher at 64.44 euros, outperforming a firmer German market.

Default swaps in Degussa also rallied, regaining some of the ground lost this month on fears of a private equity leveraged buy-out (LBO) and lowering the cost of insuring its debt.

"I wouldn't say it's that positive, but it's better than an LBO," a default swaps trader said. Bondholders fear LBOs because they are funded by loading a target company's balance sheet with debt, hammering its credit rating.

A source familiar with the matter said last week that U.S. private equity firm Blackstone was also interested in buying parts of Degussa if RAG breaks it up.

Degussa traces its origins back to 1873 when the Roessler brothers set up a company to separate precious metal from coins rendered defunct by the new Reich government, which established the Mark as a gold currency. (Additional reporting by Vera Eckert and John O'Donnell in Frankfurt and Quentin Webb in London)

Source: Reuters

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