Filed by Ashland Inc. pursuant to Rules 165 and 425 promulgated under the
Securities Act of 1933, as amended, and deemed filed pursuant to Rule 14a-12
promulgated under the Securities Exchange Act of 1934, as amended.
Subject Company: Ashland Inc.
Commission File No.: 001-02918
CHEMICAL MARKET REPORTER
THIS WEEKS EDITION JUNE 21, 2004
ASHLAND MAPS OUT STRATEGY
Joseph Chang
Expecting a cash windfall from the pending sale of its refining business
for $3 billion by the end of the year, Ashland Inc. has mapped out an
acquisition strategy designed to build on its core businesses without
overpaying for assets in today's M&A market.
"We will probably have at least $700 million on our balance sheet, plus be
in a debt free condition, so we'll have lots of deal power," said Gary A.
Cappeline, president and chief operating officer, chemicals sector, in an
interview with Chemical Market Reporter last week. "We would have about
$1.5 billion in capacity to do deals. We know that sitting on a pile of
cash is not an efficient capital structure, but blowing it on bad deals is
a worse capital structure."
Ashland will focus its M&A energies on four areas--water treatment and
other water areas, transportation and construction (Ashland Paving And
Construction), thermosets and the "do-it-for-me" side of Valvoline (for
example, Valvoline Instant Oil Change stores).
"We would be interested in water treatment and nontraditional water
spaces," says Mr. Cappeline. "We have a great pathogen control business in
Drew Industrial. From that core competency, we've taken that into other
spaces such as a fast growing business to disinfect poultry plants from
salmonella. So that's a nontraditional water space we'd like to invest in,
along with traditional water treatment businesses."
Overall, Mr. Cappeline envisions a company with around $9 billion in sales
in specialty chemicals, road construction, Valvoline and chemical
distribution. In fiscal 2003 (ended September 30), Ashland had sales of
$7.5 billion.
Ashland's acquisition strategy is built on three tenets. The first is that
acquisitions must strengthen its core businesses or close adjacencies.
"Those are the kinds of deals you can integrate more easily and extract
synergies from more efficiently," Mr. Cappeline notes.
The second tenet is not to overpay. "When the market is in an upswing as it
is right now, there's a tendency to think that is going to last forever,
but that's not going to happen, so we have to resist the temptation to
overpay," he says. "History teaches us that when you're paying outside of
5x to 8x EBITDA [earnings before interest, taxes, depreciation and
amortization], you're in danger of overpaying. We might see a deal that has
incredible synergies and maybe pay a little more than 8x, but the key is, a
little more."
Third, Ashland prefers small to midsize acquisitions in the $50 million to
$250 million range. "We don't rule out larger deals, but they have to be
very right for us," Mr. Cappeline says.
Ashland has a rigorous process for evaluating and implementing
acquisitions. The first step is for the general manager to prove the
strategic fit and attractiveness of the acquisition. "One of the
questions we would ask is: How do you combine your existing business with
the new business to create something that has more appeal to our
customers?" says Mr. Cappeline.
If the deal proposal passes the strategic lens, it has to go through the
economic lens. Ashland only counts hard synergies--cost reductions--in its
calculations. "You want to know what the margins and hard synergies are,"
Mr. Cappeline says. "Then it's a matter of seeing whether or not the
returns are appropriate." He adds that a reasonable target is earning 2 to
3 percentage points above the cost of capital, which is currently around 9
percent.
The third phase is implementation. "A lot of acquisitions fail--not because
they don't fit strategically or they don't have the right economics--but
because they don't integrate one business into the other effectively,"
according to Mr. Cappeline. "So we ask for a very detailed implementation
plan, asking which plants you will keep, which ones you'll shut down, when
you're going to shut them down, what IT systems you will be using, how long
it will take to implement, how much it will cost and so on. We also do
follow-up reviews every six months."
FORWARD-LOOKING STATEMENTS
This presentation contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include those that refer
to Ashland's operating performance, earnings and expectations about the MAP
transaction. Although Ashland believes its expectations are based on
reasonable assumptions, it cannot assure the expectations reflected herein
will be achieved. These forward-looking statements are based upon internal
forecasts and analyses of current and future market conditions and trends,
management plans and strategies, weather, operating efficiencies and
economic conditions, such as prices, supply and demand, cost of raw
materials, and legal proceedings and claims (including environmental and
asbestos matters) and are subject to a number of risks, uncertainties, and
assumptions that could cause actual results to differ materially from those
we describe in the forward-looking statements. The risks, uncertainties,
and assumptions include the possibility that Ashland will be unable to
fully realize the benefits anticipated from the MAP transaction; the
possibility of failing to receive a favorable ruling from the Internal
Revenue Service; the possibility that Ashland fails to obtain the approval
of its shareholders; the possibility that the transaction may not close or
that Ashland may be required to modify some aspect of the transaction to
obtain regulatory approvals; and other risks that are described from time
to time in the Securities and Exchange Commission reports of Ashland. Other
factors and risks affecting Ashland are contained in Ashland's Form 10-K
for the fiscal year ended Sept. 30, 2003, as amended, filed with the
Securities and Exchange Commission (SEC) and available in Ashland's
Investor Relations website at www.Ashland.com/investors or the SEC's
website at www.sec.gov. Ashland undertakes no obligation to subsequently
update or revise the forward-looking statements made in this news release
to reflect events or circumstances after the date of this release.
ADDITIONAL INFORMATION ABOUT THE MAP TRANSACTION
Investors and security holders are urged to read the proxy
statement/prospectus regarding the proposed transaction when it becomes
available because it will contain important information. The proxy
statement/prospectus will be filed with the SEC by Ashland, and security
holders may obtain a free copy of the proxy statement/prospectus when it
becomes available, and other documents filed with the SEC by Ashland, at
the SEC's website at www.sec.gov. The proxy statement/prospectus, and other
documents filed with the SEC by Ashland, may also be obtained for free in
the SEC filings section on Ashland's Investor Relations website at
www.Ashland.com/investors, or by directing a request to Ashland at 50 E.
RiverCenter Blvd., Covington, KY 41012. The respective directors and
executive officers of Ashland and other persons may be deemed to be
participants in the solicitation of proxies in respect of the proposed
transaction. Information regarding Ashland's directors and executive
officers is available in its proxy statement filed with the SEC by Ashland
on December 8, 2003. Investors may obtain information regarding the
interests of participants in the solicitation of proxies in connection with
the transaction referenced in the foregoing information by reading the
proxy statement/prospectus when it becomes available.