Yule Catto has acquired its largest competitor in a deal worth £376m, roughly equal to the FTSE 250 chemical group's own market value before the announcement. To help finance this, it has announced a £225m rights issue at 116p per share - a 61 per cent discount to the current share price.
The target, PolymerLatex, is based in Germany but currently owned by the London private-equity group TowerBrook Capital. It operates in many of the same markets as Yule Catto's core Polymer Chemicals division: water-based polymers for goods like paint, glue, carpet backing and latex protective gloves. Yule Catto was already the global market leader in a number of these niches; PolymerLatex’s manufacturing plants and client-list should reinforce and diversify that leadership - assuming the chemistry between the two groups works out.
This looks like good news for investors who followed our August tip (Buy, 217p, 16 Aug 2010). Major acquisitions always carry significant risks, but PolymerLatex is an obvious strategic fit and the price-tag - which includes shouldering PolymerLatex's massive debt pile as well as buying its stock - seems reasonable at less than 7 times cash profits. We reiterate our buy advice and recommend taking up the rights.
Last IC view: Buy, 217p, 26 August 2010