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DEALTALK-After failed auction, Chemtura may remain in play
Fri Oct 19, 2007 7:01am EDT

NEW YORK, Oct 18 (Reuters) - Chemical company Chemtura Corp put itself up for sale earlier this year, according to sources involved in the process.

And while the Merrill Lynch-run process fizzled, the company is hardly out of the merger and acquisition spotlight, thanks in part to an activist investor sitting on its board.

The question for investors now is whether the company's current restructuring will become a long-term strategy or a prelude to another auction.

The Middlebury, Connecticut company, with a $2.3 billion market capitalization, makes specialty chemicals for the agriculture, pool, construction and packaging industries. One reason the company could be ripe for the picking: it has trimmed down through job cuts, plant closings and selling assets.

Another reason is that its shares trade at just under 6 times cash flow, a cheap multiple compared to its peers.

Still another reason: Trian Fund Management LP, run by activist hedge fund investor Nelson Peltz, had a 4 percent stake in the company as of June and has his firm's co-founder on Chemtura's board.

In addition, Chemtura has another dealmaking shareholder in Apollo Management, the private equity firm that owns nearly 2 percent of the company. Sources say Apollo was the lead bidder in the Chemtura auction. 

"I think there would probably be strategic buyers who would want to acquire specific business assets," said analyst Jay Harris, of research firm Goldsmith & Harris. One attractive asset is Chemtura's crop protection unit, he said.

Harris thought any buyer would likely be more interested in certain assets as opposed to the whole company.

But the auction earlier this year was for the entire operation, sources said, declining to say when exactly the process took place.

Chemtura's stock rose more than 20 percent by mid-July and quickly fell shortly after, suggesting some in the market got word that a sale process fell apart. Chemtura's stock is roughly flat for the year, closing on Thursday at $9.54.

ACTIVIST ON BOARD

Chemtura, with $3.5 billion in sales last year was formed in 2005 when Crompton Corp acquired Great Lakes Chemical Corp. With shares of the company back down into the $9 range, at least one shareholder is unlikely to sit still.

Trian's Peltz is known for pushing companies into selling off divisions or selling themselves entirely. Pressure from Peltz forced burger chain Wendy's to spin off Tim Hortons Inc, its coffee and doughnut chain. Wendy's then put the rest of its business up for sale, with Peltz's other fund Triarc, offering to buy it.

Chemtura and Trian declined to comment. An Apollo Management spokesman could not immediately be reached.

This year has seen several takeovers by big chemical makers. Analysts and bankers this summer said that deals would continue in the sector, but with smaller companies in focus.

Indeed, sources say Merrill Lynch ran a quiet auction for Chemtura. Private equity bidders showed up, but were concerned about Chemtura's integration of businesses and cost pressures throughout the industry, one source involved with the process said, adding that Apollo Management was the last bidder standing before backing out.

Merrill Lynch declined to comment.

AFFORDABLE COMPANY

With shares trading at $9.36 at the time, Deutsche Bank analyst David Begleiter said in August that the company was trading at 5.8 times its 2008 estimated earnings before interest, taxes, depreciation and amortization (EBITDA) -- a key measure of cash flow. Chemtura's peers were trading at 7.9 times forward EBITDA, Begleiter said.

While the credit crunch has limited private equity firms, it has not taken corporate buyers from the M&A game.

Dow Chemical Co and DuPont Co were seen as potential players in a mega-chemical deal this summer. Dow, which said it is not up for sale, has since said that it is interested in medium-sized acquisitions.

Chemtura, run by Chief Executive Robert Wood, a former Dow Chemical executive, would fall into that category. CEO Wood would receive a compensation package worth about $14 million if the company were sold and he was no longer top executive, Chemtura's latest proxy filing said.

Any buyer of the company or its assets would need to deal with poor quarterly numbers and thin profit margins.

Chemtura is also contending with the overhang from 2004 when Crompton pleaded guilty in a criminal antitrust investigation for manipulating the price of certain rubber chemicals between 1995 and 2001. 

The U.S. Department of Justice hit the company with a $50 million fine. In its quarterly statement filed in August, Chemtura said it continues to cooperate in criminal and civil investigations involving possible antitrust violations concerning the sale and marketing of other products.

Howard Rappaport, global business director and chemical industry expert at consultant CMAI, said there are options for financial investors or competitors to expand in the chemical industry. "In the environment we're in today, anybody could be a prospective buyer," said Rappaport.

Source: Reuters

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