September 01, 2014

DNL to launch tender offer for remaining COAT shares

In a press statement, D&L Industries (DNL) said over the weekend that it intends to acquire the remaining 65.3% stake in Chemrez Technologies Inc (COAT). DNL currently owns the remaining 34.7% of COAT. DNL believes that COAT, which manufactures oleochemicals, resins, and special chemical products, is currently “mispriced” given its profitability. DNL plans to launch a tender offer for the remaining COAT shares at P6 or at a 24% premium over the 60-day average price of COAT shares. COAT closed at P5.75 last Friday.

DNL hopes to complete the tender offer in time to consolidate COAT’s results starting 4Q14. In 1H14, COAT posted net income of P207m. This grew by almost half and partly driven by a 29% growth in revenues.

Our take: At P6/sh, DNL’s tender offer for the 63.5% of COAT will cost the company around P5.1b and will put COAT’s market capitalization at P7.81b. It intends to finance the acquisition using the remaining P2b in cash from the proceeds of its Dec 2012 IPO. The balance will be raised through debt and/or equity issuance. While COAT will be immediately earnings accretive to DNL, the impact to EPS may be limited depending on the extent of equity issuance by the company to partly finance the acquisition.

At any rate, we believe COAT is the fastest growing unit within DNL and faces attractive prospects given the requirement for oil companies to comply with the Biofuels law. It also addresses a key market concern regarding DNL’s ability to put into a productive use the hefty cash it generated from the IPO. – WealthSec